"After a week of shutdown, now I truly understand why dogs get excited when you take them for a ride." - unknown
As we enter the 5th week of this selloff, the market is now down about 35% from the mid February highs. Many people are talking about this being an incredible buying opportunity, and we don't disagree. However, if you expect the market to bounce right back to those all-time highs from February, you should understand it's probably not going to be that simple.
Between low interest rates, the wave of investors switching to passive/index investments, a rapid increase in the amount of flows through defined contribution plans, and several quarters of slow earnings growth, it's understandable how the market became so expensive in relation to the historical average price to earnings multiple. Going forward, the question is whether or not the Fed has the ability to stimulate the economy with their traditional tools, which will lengthen the time it will take before companies can start increasing earnings again.
Another concern is whether or not investors change behavior after this decline, whether it be changing contribution rates to their 401K plans, switching from passive to active managers, or finding alternative investment options when seeking yield.
It's hard to imagine the world won't be a very different place when we're all able to go back to normal, whatever normal means by then. Things like this tend to change behavior, and with the domestic energy complex struggling and service sector workers applying for unemployment in record waves, there's a chance more bad news could take this market even lower. Is this a wonderful buying opportunity? We think the answer is probably yes, but we're not ready to go all in yet, even better opportunities might be just around the corner.
We hope everyone is staying safe and keeping distance so we can shake this virus and get back to our normal lives soon.
All the best,
The Sphere Wealth Management Team
Sphere, LLC is a Registered Investment Adviser. Advisory Services are only offered to clients or prospective clients where Sphere, LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by Sphere, LLC unless a client service agreement is in place. Additional information about Sphere, LLC also is available on the SEC's website www.adviserinfo.sec.gov