After quite a ride over the past two weeks, it seems as though stock markets in the US have come to grips with the nasty spread of the Coronavirus.
Sadly, numbers continue to rise in terms of those diagnosed with the virus and the unfortunate death toll. However, the market seems somewhat content with the geographical containment and the efforts in place to screen and quarantine. The result is that, at least for investors, the damage is being contained. Therefore, we saw new all-time highs in US stock indexes this past week.
Stock prices remain “overvalued” on a historical basis. Not nearly as overextended as they were at the end of 2017, but still relatively high. Markets can persist in an overvalued state but do become more sensitive to negative news the more overvalued they get and the longer they remain overvalued. Below is a chart going back to 1964 showing how valuations can compare with the S&P 500 over time. It is important to note that US stock prices have remained “overvalued” as measured by Price/Earnings Ratio for much of the time since 2016.
This data is one of the important ingredients to understanding how markets might react to headline risks in 2020. This is a major election year and we likely have not yet seen all of the disruptive headlines to come this year. Therefore, it is important for investors to be ready to absorb information without allowing themselves to get sucked into the vortex of emotions that can sweep through equity markets. Admittedly, that is much easier to say than do. It is not difficult to stay invested when markets surge 2-3% in a week. It is somehow much harder when it drops a few percent since most investors want to avoid big losses and risk of large declines is always in the back of many investor’s minds.
The most effective way to manage our own propensity of running for the exits is to have a strategy for both investing and selling. These strategies have their own sets of risks, including the risk of making wrong decisions. However, over time, a well-designed strategy should focus on preserving an investor from being forced to make decisions in the “heat of the moment.”
I have no doubt that the volatility in 2020 will not fail to expose itself as we approach various points this election year. The news has had no shortage of information these days. For now, things seem a bit peaceful. Enjoy the moment, but have a plan for the more strenuous days.
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