The novel coronavirus, COVID-19, took the world by storm this year. The pandemic has impacted virtually all areas of the world, and that impact has been both economic and tragic. As I write this, more than 6 million US citizens and nearly 25 million people worldwide have been positively diagnosed with the virus. Certainly, many more have likely contracted the illness, but were not tested.
Countries throughout the world locked down their economies and their citizens to combat the rapid spread. The result was instantaneous economic downturns, the likes of which have not been seen in the past 100 years. In 5 weeks, the US stock market declined from all-time highs to levels more than 30% lower. That was the sharpest, steepest decline ever witnessed from an all-time high. To make matters more interesting, in the ensuing 5 months, the stock market is once again making new all-time highs!
“Strange”, “bizarre”, “unprecedented” are words that do not capture the magnitude of transition the markets have made this year. As difficult as it was to see the record-setting decline coming, it is even more impossible to have imagined new all-time highs just 5 months after establishing the lows. Even an optimist like myself was hopefully thinking that by the Spring of 2021 we had a shot at getting back to the highs made last February. Getting there in less than half the time my optimism hoped for makes my head spin… so where do we go from here?
The more important questions are: Why markets are priced where they are? What would it take to move the markets higher or lower (a little lower is okay, but a lot lower is everyone’s concern)? Markets get priced according to many factors. The most important one is “intrinsic value”, which is the value ascribed by discounting all future cash flow values and adding them up to calculate a present value. The next most important pricing factor is based on supply and demand of individual assets, whether it’s stocks, bonds, real estate, gold, bitcoin, commodities, etc.
Discounting future cash flows is a bit of a guessing game because we don’t really know what those cash flows will be in the future. We expect them to be certain amounts, but we can’t be sure. If you own a rental property, are you sure you will receive the rent? This pandemic has made collecting rents a lot more difficult which makes the discount mechanism change. As a result, the intrinsic value changes.
Supply and demand have been impacted by huge Federal Reserve monetary injections and huge Federal Government pandemic stimulus packages, again injecting enormous amounts of money into our economy. All this stimulus is designed to help the people most impacted by the pandemic, but nearly everyone received some sort of benefits and some of those didn’t need the money. Many that didn’t need the money deposited it in the bank or invested it in other assets, helping to push those values higher. That’s what got us here, so where do we go now?
The Federal Reserve announced today that there is almost no likelihood that they will raise rates until 2025! If that’s the case, then the discount rate to calculate intrinsic value stays low, resulting in a higher calculation. Supply and demand can be impacted in a negative way by either another lockdown or raising taxes in the near-term. Without either of those events occurring, we are likely to see market prices grind their way higher as business re-open and get back to where they were prior to February. The recent leaders in the stock market have benefited by the pandemic and are likely to keep most of those gains. In the end, it is best to let the markets tell us what is happening and stay away from the guessing game of forecasting what might or could happen down the road.
Art is the Founder and President at Capital Growth. He specializes in Wealth Management. Art has 3 children and 6 grandchildren and has always had a desire to help out children who are affected by unfortunate circumstances. Learn More.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The Standard & Poor’s 500 (S&P 500®) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are not available for direct investment. The performance of the index excludes any taxes, fees and expenses.
Registered principal offering securities and advisory services through Independent Financial Group LLC (IFG), a registered broker-dealer and investment adviser. Member FINRA & SIPC. Advisory Services through Capital Growth, Inc. (CGI). CGI and IFG are not affiliated.