Various earnings reports, data releases and the IMF’s World Economic Outlook have served investors notice not to get ahead of themselves. Truly, global risk assets have moved lower this week in response to historically disappointing corporate earnings and economic reports. It’s certain that the stay-at-home orders in 42 states have essentially shut down the national economy.
One reason for the recent market bounce is that some market participants expect the negative effects from the quarantine to be short-lived. But, this market view assumes that a few things need to go right in order for a v-shaped recovery to take place. This includes a rapid end to quarantine efforts, a back-to-normal mentality for households and businesses operating pre-coronavirus capacity. Market moves lower this week suggests that such assumptions could in fact not hold out in the near term.
While timing the market bottom is interesting, what should be of more concern for investors right now is whether market prices accurately reflect outstanding risks. We believe that this may not be the case today. Therefore, making high conviction calls in one direction or another at the present time could be a setup for investor disappointment. The challenge for market participants right now is whether their expectations are misplaced.
Volatility may increase in the coming weeks as market participants begin repricing the likelihood of a longer, deeper protracted recovery. Therefore, we believe that investors should hold off on taking unnecessary risk in their portfolio.
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