Photographer: Jin Lee/Bloomberg
The stock market just completed a 50% retracement of its coronavirus plummet. So, good times ahead? Probably not yet.
Disclosure: Author just sold equity portfolio and now holds 100% cash reserves
Perched atop a 3-week peak to which it was driven by reduced negativity is hardly cause for a bull market rallying cry. Instead, the stock market needs to prove its mettle either by pausing to build a foundation or by testing (i.e., not breaking below) its recent lows.
Dow Jones Industrial Average chart from 2016
John Tobey (StockCharts.com)
SP500 chart from late 2017
John Tobey (StockCharts.com)
To rise further from its current position requires positive news, particularly from companies. There was hope that JPMorgan Chase JPM CEO Jamie Dimon would provide a post-coronavirus outlook plus growth strategies in the company’s earnings call (morning, April 14). However, that hope was dashed by his recently released 2019 Annual Letter that discusses the bank in 2020. Below are two key points regarding the environment we are in (underlining is mine):
“Halting buybacks was simply a very prudent action – we don’t know exactly what the future will hold – but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008. Our bank cannot be immune to the effects of this kind of stress.”
“When the time is right and the future is clearer, I will provide a more complete and current view on how this crisis might change our strategies around how we run the company, work with our clients and governments, and develop public policy solutions.”
So, where does that leave this earnings season?
First quarter earnings will provide a taste of what to expect in the second quarter. Discussion will likely be limited to preserving company strength and survival, along with strategies for the current environment. Expect any hints of post-coronavirus thinking to be tempered by conditional statements.
Therefore, valuations and forecasts based on 1st quarter earnings and company outlooks/strategies will be unreliable.
How about the second quarter earnings reports?
The full brunt of the slow-down/shut-down coronavirus period will be felt in the April-June period. Revenues and earnings likely will be poor even if, by the end of June, businesses have been allowed to return to pre-coronavirus operations.
If operations have restarted, the outlook/strategy comments could be especially helpful. They would allow both for more accurate valuations and for a return to future growth projections.
The bottom line
Today’s stock market lacks the sound valuations and reasonable growth forecasts needed for a sensible evaluation of its current level. Instead, uncertainties (and, therefore, risks) remain high.
An investment strategy of waiting for the dust to settle usually means missing a buying opportunity. However, when a dust storm obliterates all, risk is unacceptably high.
Therefore, holding cash reserves for future opportunities seems the best approach currently.