It is hard to square the idea that the stock market is booming, while the broader economy is suffering its worst downturn since the Great Depression. How does this make sense?
It appears two dominant (and opposing) forces are driving the stock market: (1) The economic impact of coronavirus, and (2) The Fed. In the beginning, it was just COVID-19, and the market collapsed. But the Fed stepped in, providing massive amounts of liquidity (read: stability) to the financial markets. At the same time, stimulus checks and forgivable PPP loans kept money flowing to consumers. As a result, the stock market came roaring back.
Fast forward to today. Federal stimulus is waning at the same time the virus is surging, which will contribute to some nasty headlines—both in terms of the virus… and… the health of our underlying consumer-based economy. That is, if the outlook for employment and spending start to deteriorate, then investors are likely to start questioning the rich valuations (and risk) of the stock market. But until then…
Don’t Fight the Tape or Fed.
The big concern for the stock market is valuation. At some point this will be corrected either by lower stock prices, a resurgent economy, or some combination of the two.
In the meantime, the stock market is likely to remain mildly bullish.
Nevertheless, when one takes a longer-term perspective, the fact remains that stocks were overvalued by historical measures prior to the COVID-19 pandemic, and stocks have returned to these same levels of overvaluation.
For this reason, we expect a lot of back-and-forth as the market digests conflicting headlines regarding the shape of the COVID recovery.
Portfolio Strategy
For the first time I can remember, analysts are evenly fragmented. That is, just as many analysts think the market will go 10% higher as think it will go 10% lower. Likewise, just as many think it will only go up by 5% compared to how many think it will go down by 5% over the next 12 months.
My takeaway is that the range of potential outcomes has never been as wide, or as hard to predict. There are great investors like Warren Buffett and others that do not trust the situation enough to invest here. Still others are riding the bull market claiming Buffett has lost his edge. There is no longer a “consensus view.”
Given the uncertainty, we feel our balanced approach of incorporating stocks, high-quality bonds, and low-volatility real estate is a good one during this transitional period.
Our real estate investments have luckily avoided exposure to multi-tenant office buildings, senior-living centers, or malls. Instead, our real estate is focused in warehouse distribution centers, apartment buildings, and essential retail like groceries, pharmacies, and home improvement centers. We are confident in these types of real estate during the pandemic.
– Hank Nicholson, CFP®