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Market and Economic Update: Think Longer Term

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2 years ago

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March 4, 2023

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Hopefully this pandemic will be a once-in-a-lifetime experience, and the same can be said regarding the volatility we have endured in the first 3.5 months of 2020. Here’s a quick recap of the recent market action: On February 19, 2020, the S&P 500 closed at 3,386, its all-time closing high. On March 23, 2020, 23 trading sessions later, the S&P 500 closed at 2,237, down 33.9% from that high. Now, fast forward to April 14, 2020, 15 trading sessions later, and the index closed at 2,846, up 27.2% from the closing low on March 23. For years, we have been saying the computerized trading programs are running the show, and now, we have all witnessed firsthand how acutely the trading programs can move the markets, especially when you compound the impact with investor panic amidst a global health crisis.

At the end of the day, regardless of what direction the trading programs are moving the markets, as investors, we need to understand if the markets are overvalued, fairly valued, or undervalued. However, for the next six months, and possibly longer, it will be impossible to accurately forecast the economic risk associated with the COVID-19 crisis, warranting attempts to determine the fair value for the markets as uneducated guesses, at best. This reality forces investors to think longer term when evaluating the markets. In other words, think 2021 and beyond when assessing the economy and your portfolio allocation, as anticipating market behavior for the rest of 2020 is shrouded in uncertainty until we contain the virus.

Although future predictive measures lack substance for now, we can still analyze new market data in the moment and use such numbers as gauges for the current financial and economic landscape. This week marks the start of earnings season, and it is a big week for the bank earnings with J.P. Morgan, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley all reporting. Bank earnings are great barometers for the economy as a whole because not only do we gain insights on a bank’s own health, but we also get a look at the health of the bank’s individual and business customers on a world-wide basis. For example, in terms of a bank’s consumer business, the bank tells us the degree to which delinquencies have increased on mortgage loans, auto loans, and credit cards, and for its business relationships, we learn which sectors are performing well and which ones are on life support. As to the health of the banks themselves, we learn a lot when a bank discloses its book value per share, its loan-loss reserves, and the sustainability of its dividend. In other words, buckle up – the bank earnings will give us a lot to digest by the end of this week.

Lastly, as we continue to navigate this unprecedented financial and economic environment caused by the COVID-19 pandemic, we are profoundly aware of the grave physical and emotional impacts of this virus and the toll it has taken on our everyday lives. We feel deeply for those who are suffering and for those who have lost loved ones – the severity of the environment this virus has created cannot be downplayed. Please be safe and take daily precautions to protect yourself, your loved ones, and your surrounding communities, and remember, we as a nation and as part of a powerful global community will persevere and reemerge with strength.

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