This is where the stock market could be going and where I’m investing right now!

Here’s why I reckon the bounce-back from any stock market overshoot will come, and the bull will gallop in again in the end.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

These stock market headlines caught my eye yesterday:

“The DOW is now negative under Trump’s presidency

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“US jobs market could face record damage, industries ask for aid”

“DOW drops 1,500, S&P 500 down 6%, virus cases jump”

And America’s Dow Jones Industrial Average did indeed lurch lower on Wednesday. It was last at these levels at the end of 2016. But the stock market won’t fall forever and I’m buying shares.

Speculative stock market froth has blown away

I think it’s safe to say, much of the speculative froth is being blown from the American stock market in this down-move. And I hesitate to describe it as a bear market because those things go on and on. Indeed, this one may do that. But, right now, it feels like more of a violent shock than a bear market.

The stock market can be quite a clever beast, which isn’t surprising when you consider it’s made up of all the individual investors and fund managers participating in it. That’s a lot of brainpower trying to predict the future.

But the coronavirus pandemic has been a bit of a wildcard for the markets. As every day rolls into the next, it becomes ever more apparent that the actions governments are taking to try to control the outbreak will cause severe general economic damage. As will the effect of mass illness, even if it’s only for a few days in many individual cases.

The forward-looking stock market is trying to predict the economic cost and how it will affect company profits. But, of course, there can be no precision in anyone’s assumptions.

How markets can overshoot

But markets tend to overshoot in both directions. That means raging bull markets can top out at ridiculous, nose-bleed valuations. And it means stampeding bear markets can plunge to levels way below the intrinsic value of companies and their businesses.

On top of that, the overshoot effect can sometimes be exaggerated even more by a total disconnect between stock prices and the underlying fundamentals of a company. We saw that on the upside in the dot-com boom near the turn of the century. Maybe we’ll see it on the downside with the coronavirus-induced panic of 2020. It’s a possibility I’m bearing in mind and by no means a certainty.

We could be in for a rough ride yet in the markets. But if we do see an overshoot to the downside, or even a turbo-charged over-shoot as I described above, it will likely correct.

But I reckon, in the end, even after it corrects up a bit, the stock market will rebase lower than it was at the start of this panic. It’ll take real macroeconomic progress to prod the bull back into action. So I’d handle it now by holding on to my stocks and investments, and drip-feeding money gradually into high-quality shares, managed and tracker funds.

I reckon the bounce-back from any overshoot will come, and the bull will gallop in again in the end.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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