A puzzling scenario that has been developing over the last few weeks is the disconnect between the stock market results and the state of the economy. With unprecedented unemployment, dismal industrial numbers, and companies still not operating at full capacity, the Federal Reserve chairman announced this week that it may be five years before our economy reaches the level that it was at last year. However, in the same day that he made that announcement, the stock market indexes had a positive day. I would like to discuss two items to consider and discuss our approach during these uncertain times.
Where we have been
Th stock market peaked in February of this year and seemed to reach a bottom on March 25th. Since then, the market has recovered about 60% of its losses from the peak in February.
Forward-looking valuations
One reason for the disconnect is that the price of the market tends to reflect an estimate of the future rather than the current news. Currently, there are expectations that corporate earnings will experience a strong recovery through the following years. The current price of stocks considers these expectations. If a company has strong fundamental financials but is struggling because of the pandemic right now, investors are willing to buy with expectations that the company’s earnings will reward them in the future.
However, on the cautious side, expectations may be overly optimistic. It is possible that corporate earnings will not show as strong of a recovery as is expected. There is still a lot of uncertainty right now.
Government Stimulus
The second reason for the disconnect is that the Government took very quick action to provide a stimulus for the stock market to recover. The amount of liquidity that was pushed into the market provided almost immediate stability and was a major catalyst for the recovery that we have seen. This continues to contribute to the strength of the market. The Government provided stimulus for the main street as well, however the results for the working class were not as immediate and strong to keep the economy on track.
The caution on this point is that the actions that have been taken have been important for us now, however the cost in the future is yet to be determined. Federal deficits are growing, and the worry over extreme quantitative easing is that it will create over-inflation in the future. There is a lot of debate about what future effects we will see.
How we are approaching the disconnect
At Centered Financial, we don’t try and predict the future. We stick to systems that are driven by research and are expected to provide long-term positive results.
Right now, we are continuing to dollar cost average into our full portfolio positions. After raising cash at the end of February, we have periodically invested on a system to take advantage of fluctuating prices.
We have positioned our portfolios toward less economically sensitive sectors including technology, healthcare, and consumer staples. While reducing exposure to cyclical sectors like real estate, materials, and energy.
We are using somewhat of a barbell strategy by investing in sectors and companies that are expected to perform well during recessionary times while also buying positions that provide quality and the opportunity for growth in the future when we start to see more of an economic recovery.
As always, these are very general descriptions, and if you have specific questions we are happy to discuss your personal strategy.