I shake my head at how strange this year has been, and we haven’t even reached the election or the year-end cold and flu season yet. In this brief video, I’m going to talk about the stock market and what I think has been priced in already and what hasn’t been priced in.
After the crash in March where the stock market fell by close to 35%, we have seen a major rebound in the indexes. The economy is still in recession so why isn’t the market reflecting these tough economic times? Here’s what I think is already priced into the market.
First, I think there is an expectation that with all the smart medical people and the big pharma companies working tirelessly, there will be a vaccination for Covid-19 within the next 6 months.
Next, I think there is a realization that we are beginning to figure out how to co-exist with this virus because that is what we are going to have to do. Maintaining good protocols like keeping your hands off your face, washing your hands, social distancing, and wearing masks when appropriate. In the same vein, doctors are figuring out how to better treat Covid-19 patients.
I think to an extent social unrest is priced into the market. The expectation that Congress will get their stuff together and pass some type of a stimulus bill to make up for the mandated lockdowns is priced into the market. Even to an extent, the Democrats taking the White House in November is priced in.
Here are a few things that are not priced in:
Another national lockdown due to the virus. The Democrats taking the Senate and the potential for major changes to taxes and regulations. The effect of budget short falls for states and municipalities. What’s that going to do to muni bonds? What’s that going to do to pensions? A continued decline in the dollar index isn’t priced in…the rise in gold is showing you that. The potential for negative interest rates; could that really happen here? Hey, it’s 2020 and anything can happen. And what about an escalation of a cold war with China; could things get worse?
There is an old saying that goes like this: “Hope is a good breakfast but a bad supper.” As I have said many times, there are a lot more things that can happen than will happen and everything that happens won’t be bad. That said, right now, I think the market is expecting a lot of good things and the indexes are showing that. Disappointment is going to manifest itself in stomach churning declines and a loss of investment appetite. Of course, this is the exact opposite reaction an investor should have because you have to remember that volatility is what gives the opportunity. I’m telling you to embrace volatility and not be afraid of it.
Maybe good things are going to happen. Maybe not. This is the hand we have been dealt and we have to play it. Let’s hope for the best but having a good plan B isn’t a bad idea.