Bill Schmick | @theMarket: There is still more 'downside' than 'upside'
The volatility that has descended upon the world's financial markets is unprecedented. As such, there is little point in trying to buy or sell stocks, bonds or commodities. Doing so would be like standing on the beach in the middle of a hurricane with an umbrella.
There are two issues besetting the stock market. The first issue is the near certainty that the number of cases and deaths caused by COVID-19 will increase. That should cause state, local and the federal governments to take even more drastic measures to safeguard the population. In turn, those measures will do further damage to the economy.
The second issue, somewhat obscured by the wave of fear and panic brought on by the pandemic, is the meltdown in the country's credit market. That concern, combined with the virus, is a body blow that could engender a financial crisis if not solved quickly and expeditiously.
The virus is what it is. Beating it is in the hands of Americans first and the medical community second. Until all Americans accept the guidelines that state and local governments have implemented — social distancing, working from home, no large gatherings — the virus will continue to spread and escalate.
Anecdotal evidence indicates that there are still many, many companies and individuals not working at home and are still ignoring the guidelines. One client of mine scoffed at what he called the emotional behavior of those who were not out and about. To him, what is happening in Italy, Spain and a host of other countries won't happen here.
The medical solution to this virus will require more time than we have. The fact that the government did little to nothing to prepare for this viral tsunami, and why, can be sorted out later, more than likely in the voting booths come November's presidential elections. In the meantime, as I wrote two weeks ago, expect a recession.
The best case would be two to three down quarters of economic growth, followed by a recovery. It could be an even longer recession unless Congress increases its proposed stimulus packages to the tune of multitrillion-dollar spending. It will also depend on the duration of this virus, which leads us right back to when you and your family members finally get with the program.
Don't confuse the multitrillion-dollar monetary programs that our central bank is implementing as something that can be done in place of the government's fiscal response. To the contrary, the Fed is trying to inject enough liquidity into the credit markets to prevent a credit collapse.
Remember all those years of low to negative interest rates? Countries, corporations of all sizes and shapes, hedge funds, individuals and who knows who else have been borrowing money in the form of credit, bonds and other debt instruments for years. They have been using the proceeds to speculate in the stock market, or to buy back stock, or raise dividends.
As long as the markets kept going up, everyone was happy. And then, the virus came. Stock markets fell and everyone ran for the exits in the debt markets at the same time. Buyers disappeared. Prices fell lower, and the buyer of last resort, the Fed, had to step in.
The first thing you must realize is that this mess will require time to unravel. It won't be an opportunity to "buy the dip," cash in and walk away happy by June or July. Sure, once a "cure" or a decisive action to stop the spread of the virus occurs, I would expect markets to rally. After that, we will need to see what damage the virus and the credit problems have wrought on the economy.
Those answers should become apparent over several months, if not quarters. As that data unfolds, I would not be surprised if the S&P 500 Index finally bottomed at the 2,000 level for a whopping 40 percent decline when all is said and done.
My best advice is to stop checking your accounts. There is no point in doing so. What gains you might have today will likely evaporate tomorrow.
It is not the end of the world (although it may feel like it). Stocks will come back, and so will your retirement accounts over time, and most of us have that time.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Schmick's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 888-232-6072 (toll-free) or email him at firstname.lastname@example.org.
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