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Why does this matter? Well, a company’s intrinsic value is very sensitive to the discount rate. A stock’s potential upside significantly increases when analysts reduce their discount rate, as some are doing now.
Ultimately, we don’t know for sure what’s driving the stock market higher. It’s impossible to determine how much of the move is based on fundamentals, such as long-term profits or lower interest rates, and how much is from a less sustainable source, namely emotion-driven momentum (i.e., the fear of missing out).
The mysterious market rally won’t be the last surprise we’ll have during this recovery. The COVID-19 crisis is likely to be different than most cycles that follow a predictable path guided by the laws of supply and demand. In this case, the range of possible economic and market outcomes is very wide.
It seems perverse, but when there’s so much ambiguity, investors desperately want to do something, and are therefore inclined to act more boldly than usual. But now is not a time to get locked in on one view of the world. Investing isn’t about precisely predicting the future, but rather building a portfolio that’s suitable for a variety of outcomes.
Tom Bradley ischair and chief investment officerat Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at [email protected].