Markets are trying to price in corporate earnings during a time when most businesses are shuttered, and people are both restricted and afraid to interact socially and commercially – a nearly impossible task. This is why we see violent moves to the upside and downside in the stock market. These are not driven by fundamentals, but by speculation that things are either getting better or getting worse on a day to day basis. So, let’s look at bull and bear case scenarios:
Bull: People are able to meet current obligations, stay in their homes/apartments, and return to their old jobs within the next 2 months. The economy returns to growth in the next quarter and the $2T stimulus package (and possibly another package) combined with infinite liquidity provided by the Fed and 0% interest rates lead to strong market returns.
Bear: Quarantine drags on for many months and re-opening businesses lead to spike in cases and re-quarantining. Unemployment goes beyond 20-30%, businesses are forced to close for good and people are unable to meet mortgage and rent obligations. There is a huge demand shock as people are unable and unwilling to spend they way they used to leading to significant recession and depression.
As an investor one must keep in mind that not everyone will lose their jobs and not all businesses will go under. The stock market may see much darker days ahead but there will be a recovery in time. Panic selling can decimate portfolio returns. You will never be able to catch the exact bottom, but buying at lower levels is a great way to boost returns for long-term investors.