The Investment Scientist

Will We Ever Get a 40% Market Discount?

Posted on: April 7, 2020

240_F_119564777_rEkf9eOoPwdUrMeRlzSKmO6eKokHwbvd.jpgLet me start with my usual disclaimer that I can not predict the market. Like the similar article I wrote four weeks ago, this article is simply an exercise in which I think through possible scenarios for the market. 

When I wrote “Will The Stock Market Give Us a 30% Discount?” the market had already fallen 19%, and I was thinking through the scenarios under which it would fall through 30%. One of the scenarios unfortunately came true: some US states have lost control of the Coronavirus situation, and the market did drop all the way to 36% before recovering to 23% down as it stands now.

Now with Europe finally turning the corner and the rapid spread in the US beginning to decelerate, will the market discount disappear quickly or will there be more shoes to drop that could  cause the market to give us even deeper discounts? Could it hit 40% or more?

Scenario #1: After the peak of the virus, the US and Europe are too quick to open back up, thus causing the resurgence of the virus. I think this scenario is likely but it’s probably not enough to cause the market to gap down again since the second time around, it won’t cause the same intensity of fear.

Scenario #2: This tug of war between the virus (we need to close down) and the economy (we need to open up) continues for a few rounds, and he virus-induced recession lasts longer than expected, causing a credit crisis and a wave of bankruptcy. Though this scenario is probable, as long as no household names like Boeing or Citibank go bankrupt, we might still not get a 40+% discount.

Scenario #3: Did I miss anything important? Please send me an email if you can think of one.

Overall, my tentative assessment is that the best discounts may be behind us. However the recovery will be slow, and the 20+% discount will be here to stay for a while. This is great news for folks who are in the accumulation phase. Now you have a bigger discount window to accumulate productive assets.

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


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