By Matthew Stasiw.
Little Wins and Big Losses
Over this past weekend, some good news has risen amongst the hysteria of the Coronavirus pandemic. Although the number of cases showed a gain in major epicenters around the world, which include New York, Italy, Spain, and Britain, there has been a deceleration in the death rate and a new confirmed case rate. This positive, but possibly temporary, news has caused stocks to rise greatly in Monday’s session, with the Dow up as much as 1124 points as of 11:24 a.m. ET. An amazing feat, however, will this growth realistically last? The answer to this is most likely no. This is because the stock market's biggest driver in equity demand, corporate buybacks, is fading and may not return for several years. Now, what exactly is a buyback? A buyback is when a company buys back its own stock to reduce the number of outstanding shares, and it lifts the value of the remaining units. The eleven-year bull market was held afloat by buybacks and this tactic, however, the revenue slowdown from this pandemic will cause a devastating hit in companies’ abilities to buy back their stock. Although this tactic will resume, it could take years to formulate what it once was.
Positive Effect on SIMM
The good news from all of this is that the temporary rise in market value might not remain temporary. If the good news of deceleration rates proceed, and if the news of a possible vaccine for the virus continues, then our SIMM portfolio will see a general increase for the remainder of the time it warrants. That being said, this is a speculative and optimistic outlook in this time of volatility. The growth SIMM will see will not be dramatic, but a good boost for the general portfolio then it has seen in the past month.
Negative Effect on SIMM
Speaking on behalf of the general portfolio, rather than individual stock, the SIMM portfolio will not see dramatic growth long term when compared to recent years. With firms being immensely affected by the decline in corporate buybacks, stocks will be unlikely to reach their pre-crisis valuation multiples. This factor will hinder the overall growth of the SIMM portfolio from reaching its’ maximum potential over the next few years. Although the portfolio will rebound from this brief crisis, it will not be as fast as we in SIMM would hope to see.
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