The U.S. Surgeon General’s words, “This week is going to get bad” were far from comforting. The COVID-19 news is getting worse daily. We are likely to see the virus move through regions and around the country for months. We all hope the medical community will be able to handle the wave, and we pray there are enough beds and ventilators to go around, that our private sector is able to produce them fast enough to meet demand.
As an investor, understanding the psychology of the markets will be important as we continue through the volatility, look for a market bottom and ultimately climb out of the crisis. The market is pricing in such probabilities as how long we will be confined to our homes and what businesses can open and how much traffic they’ll have. The times are especially tough for travel, airlines, retail and restaurants having what could be long-term ripple effects on many other industries. Volatility will continue in the coming weeks, but it will lessen as we enter the new normal of living with the corona virus.
The financial markets historically find a market bottom in the three- to six-month period prior to an economic recovery. The timeframe puts us in that window today. While we cannot call a bottom or that panic selling is over, based on history we can anticipate a return to economic growth in the third or fourth quarter. The financial markets will begin to look past the current news cycle and on to a more optimistic future.
Keep in mind that the U.S. economy showed positive growth for the first quarter of 2020. January and February were particularly strong. March became a difficult month for stocks, as the markets, looking toward April, May and June, grew uncertain, concerned over contracting economic growth and the prospects of a prolonged economic shutdown.
Stock markets tend to begin recovering long before economic growth returns. So what is priced into the market today, and what and when will the financial markets begin to price in Q3 and Q4?
Once we begin to see a rebound in financial assets, we will enter the next phase of the market recovery, known as “climbing the wall of worry.” This phase will be accompanied by a lot of questions and chaos: How long will the virus persist? Will we have a bigger outbreak? Will we have more shutdowns? How much long-term economic damage has been done? Will the stimulus work? Keeping your plan in tact regardless of the answers—and the noise—will be extremely important.
We cannot predict government-imposed shutdown, re-openings, or virus spread rates, or numbers of beds or ventilators. But we can use history as our guide to navigate through volatility, market bottoms and climbing that wall of worry.
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