The Market is Always a Reflection of 12 Months Out

The Stock Market is a discounting mechanism which means it trades on what investors think the future of each individual company will be. On average, investors look out 12-18 months. Not entirely coincidently, 12 months is when taxes paid on gains are almost cut in half for most investors.

In a time of crises or uncertainty, the time aperture of the stock market narrows. The market pulls in to only look short term. Moving of late to almost day to day, and we often focus on the worst case scenario. As uncertainty recedes, the time aperture widens and we again begin to look out closer to a year.

So that brings us to where we are today. Is it going to get worse for the US population and the economy? Almost certainly. But as the future comes into clearer focus the market can look past it (or accurately price it in) to the point when the economic wheels start reaccelerating again.

Did we see the bottom in the market? Maybe. We have strung together a nice rally, up about +15% off of the bottom, four of the past five days, though the rally does seem to be weakening of late. If we are buying, it is only high quality names that will do well, even through this environment. And those high quality names are in certain segments – like stay at home / do-it-yourself. Think Home Depot and the like. Also tech stocks that rely on home users like web conferencing will get interesting.