Answering a common question from investors in the current state of the market and why I think we should be cautious before we “load the boat.”
By Michelle Connell, CFA | 2 min read
“Why aren’t you buying?” It’s an important question, but the answer goes much further than current valuations. Before loading the boat, I suggest we keep our eyes on 3 key factors:
- Weekly unemployment numbers. Expect these numbers to climb much higher than the 3.2 million claims that were filed the week of March 26th. The rationale is this: as of December 2019, over 158 million people were employed in the U.S., so only 2% of the “employed” filed claims. How long will so many Americans be without jobs?
- Credit markets. Corporate debt was high before we entered the COVID-19 crisis. As of the end of 2019, corporate debt had ballooned to 47% of the overall economy. At that same point, Morgan Stanley had determined that more than 50% of investment grade debt was rated BBB-in other words, on the precipice of junk! The longer companies go without revenues, a large percentage may have to default, even with the fiscal stimulus. As more companies face insolvency, more people will lose their jobs and this recession may last longer than we initially thought. (Note: China’s lagging recovery from the virus currently shows us that this is a big probability.)
- Valuations. We cannot make the statement that investments are cheap with so many unknowns. For example, P/Es are dependent on the “E,” or earnings. When companies report earnings on March 31, earnings expectations will be down, but companies may also have no idea what to expect for Q2, or the remainder of 2020. Only when these announcements are made can we determine what is “cheap” compared to historical averages.
About the Author
Michelle Connell, CFA is the President and Owner of Portia Capital Management, LLC, the only Registered Investment Advisory firm in DFW to be founded by a female CFA. Ms. Connell is one of the highest-rated finance professors in the United States, currently serving as an adjunct professor at The University of Texas in Dallas and teaching the CFA Review for the DFW CFA Society. Ms. Connell works with her students and private clients to understand the value of crafting a portfolio that includes conventional products as well as alternative assets, including private equity, private debt and real estate, and allows investment portfolio creation with greater downside protection and more consistent returns.