When Ignorance Isn't Bliss

"It's not the bad news, it's the uncertainty," says Jim Paulsen, Leuthold Group's chief investment strategist.

The traditional fundamental data points that investors rely on haven't been worth much in recent weeks. Many are backward-looking, and don't reflect conditions in the economy or market as they are today, which is meaningfully different than just a month ago. Others are based on assumptions that are changing by the minute, or can't be taken seriously when a virus and containment measures suddenly slam the breaks on consumer and manufacturing activity.

Daily Covid-19 case counts from the World Health Organization have consumed much of the attention, and they've only been getting worse as the global curve steepens despite improvements in some individual countries.

Meanwhile, the incoming economic data in the last few weeks from most of the world has been strong, Paulsen says. As were corporate earnings from the fourth quarter of 2019. But they hasn't worked as a reality check for forward-looking investors struggling to put a fair value on the tumbling stock market.

"When the current data is totally ignored because it's irrelevant, it removes any fundamental guidepost and leaves investors to price a market based only on their worst nightmares," Paulsen says.

Those worst nightmares include tens of thousands of deaths and months of quarantine that keeps economic activity at a standstill. The New York Federal Reserve’s Empire State business conditions index plunged a record 34.4 points, to -21.5 in March, its the lowest level since the financial crisis in 2009. It's one of the first U.S. economic readings to cover a period when the coronavirus began to affect the economy.

And there's much more to come: Fed Chairman Jerome Powell said on Sunday that he expects that GDP will contract in the second quarter. Still, once investors can incorporate that hard economic data, they'll be able to take more informed views of how stocks are valued.

"I welcome the fact that this morning we started to get the bad news that everyone fears," Paulsen says. "Because at least we'll begin to get reconnected to some sense of reality...An old adage might come to mind, and that is 'sell the rumor but buy the news.'"

Paulsen also points to the bond market, which started to flash warning signs to investors before the stock market turned over in mid-February. Yields on Treasuries began to collapse the week that U.S. stock indexes continued to notch record highs, and they have gone only lower since as stocks tumbled into a bear market.

But over the past five trading days, Treasury yields have held their low even as the Fed cut rates to near zero and announced trillions of dollars of bond-buying programs. Paulsen sees that as an encouraging sign that could be an early indication that stock are likewise hitting a low point.

But after weeks of intense volatility, it could take some time to convince fearful investors that it's safe to wade back into the stock market.

"I've got to believe there are buyers out there, but who's going to step in front of something that's flying around 10% a day?" Paulsen says. "Even if you're licking your chops, who's got the guts to do that?"