The decline in the stock market that started in February accelerated in March. Each of the indexes we follow were down in March. The NASDAQ lost the least amount at 10.1%, while the small cap Russell 2000 gave back 21.9% of its value. So far this year the Dow has lost 23.2%, the S&P 500 is down by 20%, the NASDAQ is off by 14.2% and the Russell 2000 is a whopping 30.9% below its value of January 1st. The Dow finished the month of March at 21,917. It had not finished a month at a lower point since July, 2017. Just a week before, on March 23rd, the Dow had finished at 18,592. It came back up when the anticipated two trillion dollar stimulus package stumbled over the finish line and finally came to a vote in the House. Over a three day period it rose almost 4,000 points. That’s a 21% gain.
Folks, I watch the market every day. That gain was not warranted. The stimulus may help some companies stay afloat until America goes back to work, but it won’t be putting any profits in the pockets of their investors. So I saw the run up in the stock market as sort of a sugar high. I don’t think it is sustainable. So, where is the market going from here? I, just like everybody else, don’t know. But I can observe what is happening in the country and draw, what I think are some logical conclusions. So follow along with me here;
The stock market is dynamic. If there are more shares being bought than there are being sold, the price goes up. If more shares are being sold than being bought, the price goes down. Simple, right? Well, what makes people want to buy stock in a company? Usually it’s because they think it’ll make money over a period of time, more people will recognize that and bid the price up by buying more of its stock. How do we know how much money a company is making? We know because public companies must publish their financial information, including their earnings.
Well, if we know how many shares of stock the company has issued to buyers, along with its current stock price, and we know how much money they’re making, we can then figure what’s called its p/e ratio, or price to earnings ratio. So let’s say you can buy a share of stock in ABC company for $10. And the company has published its earnings of $1 a share. That means the p/e ratio of the stock of ABC company is 10 to 1, or it is selling for 10 times earnings. Historically, the Dow Jones and S&P 500 companies sell for around 16 times earnings, but some companies’ stock sells for a lot more because it is anticipated they may come out with a product that will change the world and make a whole lot of money, like Apple did with the iPod.
What happens, then, if the earnings of ABC company goes away. What if ABC company is an airline, or a hotel chain, or a cruise ship company? What happens when a viral pandemic breaks out and people stop flying, or staying in hotels, or going on cruises? What happens when Governor after Governor declares a state of emergency and ask, or even order, people to stay in their houses, and order businesses to close? What happens if millions of workers suddenly lose their jobs and have to apply for unemployment?
What do you think will happen to the stock price of ABC company when they are no longer selling their products, and they no longer have any earnings? And then multiply that by hundreds of companies. Does it make any sense for the stock market to go up under those circumstances? Well, not to me either.
Then why did it go up almost 4000 points over three days? I think people wanted to believe the market would correct itself and start going back up. I also think many of those on board the Titanic thought the ship would right itself and that they would not need to get on those tiny life rafts. But those who did get on the life rafts lived to see another day.
Folks, this Chinese Coronavirus is really nasty. The number of those being infected are still rising at an ever-increasing rate. And the percentage of those that are dying from it is also increasing. As of Wednesday, April 1st, 2.2% of the diagnosed Coronavirus cases in the US had died. On Monday, March 23rd, the rate of death was only 1.2%. There is a reason you can’t go out to eat, or go to Church, or in many cases even go to work. This virus has the potential to kill you. Our elected officials know that, and that’s why they’ve locked down America.
We got out of the stock market several weeks ago. On our managed accounts, we can get in or out of the stock market at any time. Right now we are out. And we plan to stay out until we some something to make us believe that the worst of the virus is behind us and we can look forward to better times. We hope to enter the market at a point that is much lower than we exited the market. If we are successful, our clients will not have had to take that terrible ride down, but they will be able to get most of that wonderful ride back up.
If you are currently invested in the stock market with an advisor or on your own, and you think our way of managing risk by going to the sidelines during hard times like this, then give me a call at 864-582-7766. While we may not be able to see you in person, we can certainly talk to you on the phone.