If you’re following the equity markets closely (there could be good reasons not to, by the way), you’ll likely have noticed today’s sharp retracement, the S&P 500 Index closed down -3.48% and the tech-centric NASDAQ Composite Index finished down -4.96% on the day. It’s been a few months since we saw such a move down, mostly the market has been moving higher since the calendar year lows in late March.
The market is a present value estimation of the discounted future value, and when the discount rate is historically low, i.e., low interest rates – we should expect higher present values, that’s math, it works. That said, has the market moved too far and too fast. Is it well ahead of the real economy? Are the current financial expectations exceeding what the real economy can deliver in the associated timeframe? The duration and impact of COVID-19 make these questions difficult to answer. Further, when will an effective vaccine be ready: soon? never? When will it be widely distributed: soon? never? These ranges are wide, making any type of modeling for future scenarios less than highly reliable.
Maybe the wisdom of the crowd will get this right, but maybe it does not have it sorted out quite yet. In the meantime, a balanced view of the way forward may serve us well. We’ll focus on the areas where the world is going, where demand is going, and where we can have a positive impact. Let’s use the current difficulties and uncertainties to strengthen. Happy Labor Day.
Best regards,
Rodney
September 3, 2020