The Stock Market Might Not Like Certainty Come September
As COVID-19 data infections have increased, so has the stock market, baffling investors.
While watching life in New York, as I know it, shut down completely; Amidst chaos and panic, I was expecting something like the financial crisis or dot com stock market crashes to happen.
Instead, as infections and deaths began to rise, so did the stock market. Baffling? Insane? Holy semantics, Batman!
Some have warned that prior market crashes have seen rebounds of greater than 20% prior to the ultimate disastrous declines. True. That could be what is going on here. Here is another explanation.
- Prior market crashes were characterized by very oversold conditions. This time, knowing ahead of time what was coming, the Fed was ready. They acted quickly to prevent panic and overselling. The Fed was proactive. Massive bailouts of the financial and auto industries helped save the economy in 2008. In 2020, the Fed prevented oversold conditions by a willingness to provide companies with cash and to buy fixed income and corporate debt.
- Valuations are questionably at historically high levels. This is not new. But uncertainty is higher than usual.
Corporate valuations typically come down to a multiple of price & earnings.
If you look at projected earnings for some companies, even after substantially reducing earnings for the next few quarters, you may wind up with fairly priced companies. COVID is still considered as some sectors like Airlines and Energy are much harder hit than Technology and Healthcare.
What about COVID-19 Waves
There are 3 possibilities that are likely to play out in September and these are likely factored in to valuations.
- It fades away (unfortunately, there isn’t likely a burnout scenario).
- It comes back in multiple waves of the same intensity.
- The next wave is greater than the first.
The last scenario is what happened with the influenza pandemic of 1918! In New York City, in February 1918 through June they had the first wave — many people died. In September there was a second wave. Many people x 5 died. For those of you not mathematically inclined, five times as many individuals died between September and December of 2018.
No one knows which today
Except that as one of those three become more certain, stock prices should adjust accordingly. In other words, analysts today are likely assuming that #2 will be taking place — not so good case. As we get closer to September, if it appears that the chance of scenario #1 — the best case are more than 33%, stocks will increase in price. Of course, if scenario #3 (or #2) is more likely , prices will decrease.
How you can use this information
If I knew this I wouldn't be writing this article…I would be…
…Counting my money!
Seriously, though, this should help out with timing and understanding what is going on with the markets as you plan your next investment steps.
Bottom line — markets might not like certainty this time around
Uncertainty regarding COVID weighs heavily on an already historically overvalued market but as the picture becomes more clear stock prices will mirror the likelihood of three scenarios. The Feds action has stopped market crashes seen previously in 2008 by supporting companies as we wait for COVID to run its course. However, analysts are smart enough to know that there are really only 3 scenarios. At this point each has a 33% chance and that is probably already factored in to the pricing. As these probabilities change as we draw closer to September, so will the stock market.