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What does recovery look like?

What does recovery look like?

| May 13, 2020
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The market rally is still on – despite the last couple of days of market pull-back.  Since my last post on April 9th the S&P 500 has continued to climb another 2.88% through May 12th.  This brings the return on the market up 30.94% from its lows on March 23rd.  Remarkable, really, considering we are still a ways away from finding a cure for the pandemic while the economy continues to figure out how to survive.

But, oftentimes the investment markets move opposite of what logic and rationality would indicate.  One reason for this is that the investment market is not just a robot – it exists in the decisions made by emotionally fallible humans.  Another reason is that logic and rationality exist in the here and now.  The markets tend to anticipate what will happen in the future.  For instance, market investors are fixated on expected and reported earnings.  Investors price the value of a share of stock based on what they think that stock will earn for them.  The more the expected earnings, the more valuable the share and vice versa.  Expectations, by definition, anticipate the future.  If reported earnings do not live up to the expectations, the value of the share drops almost instantaneously – unless the reason for the lower earnings is perceived to be a fluke.

That is exactly what is going on right now in the investment markets.  The market falling over 35% between February and March this year was in anticipation of all of the bad news we are hearing about today, and now the market is anticipating news it thinks we will hear in the future – that the virus is contained, the economy is open again, and businesses are able to earn for their owners/shareholders once more.  If I had to boil it down to 3 reasons the market has rallied the past month and a half I would say:

  1. Perceived improvement in virus spread metrics – i.e. “curve flattening” – and hopes for viable treatments
  2. Overwhelming governmental monetary and fiscal stimulus actions by Congress and the Federal Reserve to preserve liquidity in the investment markets and give relief to businesses and individuals in order to prop-up the broader economy – see my associate, Holman Moores’, explanation of the CARES Act
  3. FOMO – “fear of missing out” as investors see market returns gain momentum

The first two reasons are solid foundations for building on a true economic and market rebound.  The last one poses a risk that the market rally is overstated as a result of “irrational exuberance”.  In any event, we would expect as more and more information comes out about the virus and governments slowly loosen restrictions and guidance on economic activity, the markets will continue to be volatile.

I have great respect for the thought-leadership and research that the Vanguard Group produces.  I exhort you to read their perspective on the current state of the global economy.  As well, here they revisit the market recovery following the 2008-2009 Great Recession and give 3 pieces of advice for how to consider investment decisions in a crisis:

  • Don’t rely on headlines to make investment decisions
  • Recovery follows a volatile line that masks its upward trend
  • A very few days of market returns can be responsible for most of the gains during a recovery – missing them might mean drastically reducing portfolio performance

A prevailing question I have heard from clients and acquaintances over the past couple of weeks as I have shared similar advice and insight is – “Yes, but what if the economy never recovers?  What if we are entering into another Great Depression?”

There are so many ways I could answer that question, and I do not have enough space in this post to address it all – perhaps I’ll circle back around to some of those answers in future posts.  For now, I will say what I have said in the past – the question is not whether the economy recovers or not.  The question really is when will the economy recover, and I think deep down even the most pessimistic people know that to be true.  The economy will recover – it must.  There are over 8 billion people in the world, all with different talents, strengths, and ways in which they contribute to the creativity and innovation that drives economic growth.   As long as those people have a desire and ability to discover and improve their lives, the economy will not only recover, but grow.  And, consequently, the investment markets as well.

I was talking to some friends of mine last night – they are doctors serving in the COVID-19 wards of their respective hospitals – they said something that really encouraged me.  The brightest medical minds in the world have all dropped whatever it was they were researching and developing to tackle the COVID-19 virus.  The same minds that had a hand in creating vaccines and treatments for the world’s deadliest diseases – measles, mumps, small-pox, polio, Swine Flu, SARS, MERS, HIV, AIDS, etc. -  are all working together to remove the one thing impeding economic progress.  This is the Great Medical Manhattan Project.  We can either bet on them succeeding or bet on them failing.  My money is on the former. 

* S&P 500 data collected from

** Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions, however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market. The Standard & Poor’s 500 (S&P 500) is a stock market index containing the stocks of 500 American corporations with large market capitalization that are considered to be widely held. The S&P 500 is unmanaged and cannot be invested in directly.

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