Today’s column is written on trading Day 31 of my internal market timeline that started with the all-time high set in mid-February. A lot has happened in the past two weeks since my last column. It feels longer ago to me. Time is not moving at its normal pace.
It appears the economic impact created by the virus, and the lockdown, will last longer than just a couple months. I expect the recovery will be slow and bumpy. It will likely move from a red light, to a yellow light and then, eventually, to green. And, along the way, we should all expect confusing signal changes. The timing and shape of the economic recovery will be driven entirely by the virus. Given this, the pace and progress will no doubt be frustrating.
We all know how this movie will end. Ironically, that doesn’t make it any less suspenseful. Before a vaccine arrives – which experts continue to project won’t happen for at least a year – our collective efforts to slow the spread of the virus is our only moral choice. Naturally, left in the wake is the economy. The opening salvo to mitigate the economic fallout came in the form of the $2.2 trillion CARES Act signed into law one week ago.
The CARES Act’s main goal is to replace lost income for households and businesses during the lengthy lockdown. It is my view that even more financial support will be needed as we will experience only a slow ramp back to “normal.” This legislation was designed to only help cover lost income until around July. The recovery from a deeper and longer economic hole will require more. If I’m right about the slow pace of things to come, this will become more obvious on or before the end of May.
According to current models, the loss of life in the US will ramp up over the next month before we slowly roll down the curve. I fully expect this to happen in waves as new hot spots pop up across the country. With this, investor sentiment could grow more negative despite the massive financial aid provided. This sentiment shift has already started after last week’s very sudden sense of investor relief.
For now, I will stick with my view that the broader stock market could ultimately decline about 40% to 50% from the all-time high. From today’s levels, now down about 25% as of trading Day 31 on my internal market timeline, it’s very important to either prepare your mind or prepare your portfolio for a sizable additional decline in stocks.
It bears repeating, the discipline of risk management is my total focus. Sanitizing my words through the false prism of being right versus being wrong in hindsight is unimportant. As we all know, there are much bigger things to worry about. For the record, and for the sake of the economy, I do hope I’m wrong.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com