What Will Hindsight Tell Us About Today’s Market?
We all know the expression that hindsight is 20/20. Sometimes I find myself at a moment in time wondering what hindsight will say about that moment.
Back in January, I was wondering whether the emerging COVID-19 pandemic would burn out quickly, or whether we would look back on this as a monumental event. As I told someone at the time: “I don’t know if this is the next great pandemic, but this is how the next one will start.”
I was reminded of this recently when I read the following observation on Twitter. Someone commented that at the end of the year, hindsight might look back on one of the following completely different outcomes:
1) How did you miss the epic rally given the massive stimulus package and the obvious fact that a vaccine would quickly be developed? Or…
2) How did you get destroyed by being too exposed going into the worst recession in 90 years?
Those two possible outcomes highlight the challenge of investing in this market. There are serious risks out there, but the market is always forward-looking. If it looks as if a promising vaccine is on the way, even if it is early in clinical trials, many investors will give the benefit of the doubt and pile into the market.
But the economic indicators this quarter will be terrible. And they will likely continue to be terrible into the next quarter. I don’t see the economy bouncing back quickly from this, because people are going to be afraid until their safety is assured. A widely available vaccine would certainly pacity those fears, and allow things to return to normal.
What about the stimulus package? How does that play into the mix?
I have a good friend who works for the U.S. Postal Service, and he told me they are handling more packages right now than they do at Christmas. People are spending money (even though my advice would be to hoard it as a safety net against a longer-term recession).
Further, the Federal Reserve has lowered interest rates and bought financial assets to boost the economy. So what can history tell us about where this might lead?
Fidelity recently posted an article on how today’s stimulus policies might shape the future. Fidelity’s analysts noted that the long-term impacts of these policies on the markets and economy are unknown, but we can look at how similar policies have impacted markets in the past.
They note that the market recovery since March echoes the performance following the financial crisis of 2008-2009. When the Fed cut interest rates to near zero at that time and injected trillions of dollars of liquidity into the market, it helped spawn a record-setting bull market.
However, they highlight that this will continue to pose challenges for the bond markets. The noted that as a result of these policies, the “total global value of bonds with negative yields rose from zero in 2015 to $17 trillion in 2019.”
Further, they warn of unintended consequences. Fidelity Director of Global Macro Jurrien Timmer asserts: “It could prevent a typical early cycle recovery from unfolding in the months ahead. If businesses that would have otherwise gone insolvent during a recession survive through policy intervention, maybe the policy response perversely ends up muting the recovery.”
“Perhaps the price for all this intervention is a post-COVID economy with slow growth and low interest rates. In that scenario, companies with strong balance sheets get rewarded, while financially engineered zombie companies survive but don’t thrive. Only the government’s footprint is much larger.”
The bottom line is investors need to be prepared for risks, but they also should avoid staying completely on the sidelines. I think it is likely that we will continue to see a lot of volatility in the months ahead, but long-term investors should use that volatility to pick up some bargains that should weather this storm.
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