As noted in recent article in The Wall Street Journal, the stock market had its best two-week run since the 1930s while the economy is looking worse and worse. They say that the stock market is ignoring the economy. Why is the stock market ignoring the economy? Is it as the Journal suggests that investors are expecting a fast economic recovery or that they believe a miracle cure or vaccine will appear sooner than experts anticipate?
Why Is the Stock Market Ignoring the Economy?
First of all, the stock market always anticipates how it believes the economy and individual companies will be doing in the near and long-term future. Warren Buffett said that if you are not willing to own a stock for ten years you should not own it for a minute. This is the long term investing approach and it should be noted that the famed “Oracle of Omaha” has not spent any of his cash hoard so far during the market meltdown or partial recovery. Shorter term investors and traders are more focused on technical factors than fundamental analysis when investing in stocks.
The market appears to be going up because today’s investors are keying on what happened in the recovery from the 2007 to 2009 Financial Crisis instead of what happened in the Great Depression. While we have been thinking about the possibility of a ten year recession, many investors want to time the market and get it at what they believe was a short term bottom. But, there may be problems with this approach.
When Will the Profits Return?
Historically low interest rates and impressive profits, especially in the top tech stocks, are what drove the market higher and higher for a decade. We will certainly have low interest rates for a long time to come but, how soon will profits return and to what degree?
Investor’s Business Daily writes that the Coronavirus Recession May Ravage Corporate Earnings Longer than You Think.
The first earnings season of the coronavirus recession is coming up soon, and the estimates range from terrible to catastrophic. And the outlook for a recovery will depend more on infection curves and social-distancing policies than on traditional economic stimulus.
The signs point to an ugly earnings season. Since the beginning of March, more than 200 companies have withdrawn guidance, including Delta Air Lines (DAL), Twitter (TWTR), Hilton Holdings (HLT), General Motors (GM) and Target (TGT). Even Apple (AAPL) has warned it won’t hit targets.
This was written just a couple of weeks ago and is coming true as earnings reports both shock and dismay many investors. And projections range from bad to horrific.
Yardeni Research projects plunges of 23.4% in Q1, 51.6% in Q2, 28.8% in Q3 and 4.8% in Q4. For all of 2020, the firm expects S&P 500 earnings to decrease by 26.4%, before turning positive next year.
Investors, like Buffett, who have adopted a wait and see attitude risk losing out on some nice profits going forward but those who are ignoring the worst loss of jobs (and spending power) since the Great Depression are risking everything!