What would you think if I was to tell you on January 1st that over the next six months, we were going to experience the worst economic crisis since the Great Depression, but the NASDAQ will be at all-time highs, up 22% for the year?
If somebody would tell me that, I would think they’re crazy.
How can you have stocks at all-time highs during a recession, let alone by as much as 22%?
Yet here we are, in the midst of that exact scenario.
Which makes me wonder how much longer will this disparity continue? Sooner or later, some sense of logic must return, and one of the two must give.
My opinion is that it’s going to be the stock market.
Of course, I’ve been saying this for a month now, and the prices are still rising.
A wise investor once said that “Being too far ahead of your time is indistinguishable from being wrong.”
And if the market keeps climbing for another few months, it will prove that my cautious stance was actually a mistake.
However, after re-analyzing market risks, I’m not ready to change my opinion yet. I still think this is a dangerous time to be bullish.
A V-Shaped Fantasy
The most recent argument for higher stock prices has been manufacturing and jobs data.
Both have seen a significant improvement over the last months.
However, that was something to be expected.
The world economy was shut down for weeks. Of course, factory orders are going to jump. Think of the backlog that has accumulated over that period.
The same situation is happening with unemployment. After the lockdowns ended, businesses had to start re-hiring to meet the pent-up consumer demand.
It’s like stepping on and off a garden hose.
But are these trends going to continue? That’s the real question.
In a world where political stability is deteriorating, global trade tensions are rising, and the coronavirus remains unsolved, I just don’t see a scenario for a rapid economic recovery…no matter how much money the central banks print.
And since we’re speaking of the culprit of our predicament—COVID-19—best estimates show that the vaccine won’t be ready until the end of the year. That means we could see at least another wave of infection, especially in the fall when the flu season begins.
And then there’s the problem of vaccinating 7.8 billion people, or at least a large part of that.
The point I’m trying to make is that it could take a long time before the global economy, or the United States’, for that matter, starts operating normally… and that’s not something that’s reflected in the current stock prices.
At this point, stocks are still pricing in a V-Shaped recovery, signaling a return-to-normal by the end of 2020.
In my view, that’s way too optimistic.
Yes, we are going to defeat COVID-19 and we will re-build our economies, but the road to full recovery will be a bumpy one. It always has been.
So, does it make sense for the average stock to trade at the same level as before the coronavirus crisis?
“Risk Off” Is Still The Name Of The Game
OK, so now that we’ve covered the risks, the question is, how does one invest in this challenging landscape?
Personally, I’m looking at two types of investments.
I’m buying gold and related assets. You can find which one I like in my last essay.
And I’m looking for companies that can make money in both a rapid economic recovery or a more prolonged one. The one I recently recommended deals primarily with governments, making their revenues are as secure as they come. You can read more about that investment in the latest issue of my True Retirement Wealth.
Stay smart, my friend, and don’t let emotions affect your decisions.