brown on green, A Regular column about finances

Uncertainty

Recently, uncertainty and volatility have become the norm for the stock market. Investors fear uncertainty more than anything. The stock market makes wild swings up and down, and investors do not have a handle on what is coming next. Generally, investors are looking ahead and listening closely when companies give their quarterly reports. These reports not only tell what happened in the previous quarter, but also give the investor guidance into what to expect in the next quarter and even projections for the coming year. Stocks often go up or down following these reports, based on whether the company met, exceeded, or fell short of previous guidance.

The COVID-19 crisis has caused unprecedented volatility, because no company can accurately predict what impact the crisis will have on their financial future going forward. Therefore, almost every company’s stock has been hit hard during the crisis. Another factor driving the stock market down so quickly is computerized trading. Many years ago, everyone evaluated stocks on their long-term potential to produce a good dividend and to grow the company’s stock price over time. Today, using computers and algorithms, many stock traders use options to make a lot of money as the market moves up and down. This type of trading can make a good day in the market great and a bad day even worse.

Most economists believe the coming two quarters will probably be negative, which is the technical definition of a recession. However, this recession is being triggered by a shutdown of our economy to get the COVID-19 pandemic under control, not for any economic reason. If the country follows the President's suggested rules, there is a good chance the pandemic will be contained. If we succeed in containing the health crisis, the economy and the stock market should make a dramatic turnaround. Having said this, we all know the stock market can be unpredictable and is not always rational.

So, what should we do? If you have a long-term time horizon (five or more years) you should do nothing and “ride out” the downturn. If your time horizon is short (less than two years), you probably shouldn’t have been heavily invested in stocks anyway. Yet, it is best to ride it out and sell when you have recovered and move your assets into a conservative investment.

About the Columnist: David Brown is director of Free Will Baptist Foundation. To learn more about the grants program, visit www.fwbgifts.org.