While it seems strange, the stock market continues to rise while corporate earnings fall, that is what is occurring throughout this pandemic. Stock valuations base on the available data investors have at their disposal, which are the company’s facts, expectations, assumptions, and the current economic conditions. All of this is considered and not just the impacts of the COVID-19 at this moment in time.
The S&P’s 500’s price-to-earnings ratio (P/E ratio) accounts for all company stock information when determining the price of the index relative to the aggregate earnings per share of its components. The P/E ratio looks ahead the next twelve months and uses a company’s predictions for earnings to quantify what investors are willing to pay, even during a pandemic. These predictions look forward to the brighter future after the pandemic subsides.
With daily comprehensive data at our disposal, stock prices will continue to move up and down over the next few months, creating volatility as economic and pandemic data updates. While company earnings expected to be down during Q2 2020 as they were in Q1 2020, the S&P may provide strong returns from a ‘good news, bad news’ scenario:
- The world’s economies and health improving- a ’watch and see’ approach.
- States in the U.S. start to open for business.
- U.S. unemployment dropping as people are returning to work.
- Economic and pandemic data are showing a recovery in parts of the U.S. and the world.
- The possibility of a second and third wave of COVID-19?
As an investor, what should you do during periods of uncertainty when the stock market’s performance does not make sense?
- Continue to focus on the long-term goals you have set and not react to daily or weekly market movements.
- Monitor the standard deviations of returns week over week to determine overall volatility.
- Do not be too optimistic or too pessimistic- half the time the market is up, and half the time it is down.
- Stick to the allocation inside your portfolio.
- Monitor interest rates since increasing rates generally signal economic recovery is approaching.
- Continue to invest consistently and let the markets do their thing.
Remember that future stock market performance is not predictable and that the time to liquidate is not during a down market. We have prepared for volatility in your portfolio and will determine the best time to make changes. In the meantime, the market may not make sense given what is happening domestically and globally as COVID-19 continues impacting humans.