This Resilient Market Priced for Perfection
Don’t look now, but the market is within spitting distance of highs seen before the Coronavirus shutdown.
Those who panicked and sold during the market’s collapse have to be kicking themselves. As of this moment, the decline proved to be sharp but temporary.
Certain stocks like Chipotle Mexican Grill (NYSE:CMG) are now trading above their previous highs. For the year, Chipotle is now up approximately 10% according to prices published by Yahoo Finance.
If you had a market chart in front of you that just happened to be missing March and April, you’d think nothing much happened. But we know all too well that something did happen, and its effects could linger.
Is the first wave of the pandemic over? Will there be a second wave? What are the ramifications for what has already transpired?
Wall Street decided to look past these risks. It’s developed the view that there is little remaining risk from the virus. The market’s valuation is now such that we believe there is little room for any news undermining that view.
Well, we believe, that’s mostly correct. We also have to remember that fiscal and monetary policy likely stands ready to support the economy and the markets should bad news emerge. Maybe the market has just decided that no matter how long it takes us to get past this crisis, there will be plenty of money thrown at the problem to keep stocks from being risky.
Maybe the market is predicting easy money will be with us well beyond the end of the virus. To help support the economy, we can see the Fed continuing with current policies well beyond the crisis. That they may hold steady until the economy returns to normal, remaining accommodative until it occurs.
The only risk, in our opinion, would be if by these actions we begin to see structural inflation. An emergence of inflation would likely end the days of easy money, and with it the support it provides stock prices today.
Should inflation emerge, investors will require higher returns. They need to be compensated directly for the diminishing value of the currency and indirectly for the uncertainty it creates. Interest rates would likely trend higher, and we’d probably see a return to the pressure on bond mutual funds seen in March.
Since most believe the transmission of easy money into inflation is a process that takes years to unfold, the market does not see the risk as something worthy of considering today.
I think it is important to remember that the stock market is always subject to periods of losses and investor uncertainty, and each time is unique. Having a sound financial plan in place means that you are better able to weather tough markets and periods of economic stress and societal upheaval. This time is no different, even though the times we are living in are truly unprecedented, and much is unknown.
All Nicollet clients have a reasoned financial plan in place, which informs the way that we deliver advice and manage investments. The result is a portfolio that is fully customized to each client’s unique financial and cash flow picture. If COVID and the current markets have you wondering about the resilience of your financial plan and portfolio, or you’ve yet to create a financial plan – give us a call.