The Investment Scientist

Will The Market Give Us a 30% Discount?

Posted on: March 11, 2020


Let me start with my usual disclaimer that I can not predict the market. This article is an exercise in which I think through possible scenarios for the market. Also, while the media and common folks like to use “crash”, “tumble”, “fall,” etc to describe the market, I prefer to use the term“discount”. The former signifies danger while the latter signifies opportunity. 

As of the market close yesterday, after dropping 2000+ points, the Dow is right at the edge of correction territory (meaning down barely 20%.) The 2000+ point drop was the result of the double whammy of coronavirus out of control in Italy, and oil prices dropping 30% because of a price war between Russia and Saudi.

So, are there other shoes to drop? Here are the situations that could happen:

Shoe #1: Some US states lose control of the coronavirus situation, and extremely stern measures like whole city/state lockdowns have to be imposed to arrest the spread of the virus.

Shoe #2: The oil price shock causes severe financial distress among shale oil producers in the US, with the distress spreading to banks that lend them money, causing a mini financial crisis (relative to the big one in 2008.)

Shoe #3: The market no longer believes that Trump or the Fed can come to the rescue. According to my Oxford behavior finance professor, a drastic update of beliefs can cause dramatic movements of the market even without any external shock. (I will write more about this in my next newsletter.)

If these shoes drop, then a 30% market discount is in store. If that should happen, panic not. The market only gives a 30% discount once every decade. You should take advantage of this especially when you are in the wealth-building phase.

Of course, equally possible is that no more shoes would drop. In that case, we likely have seen the best of the market discount (nearly 20%) for the time being.

Schedule a 2nd opinion financial review, buy my wealth mgmt books on Amazon.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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