3 min read.
The economy, Stockmarket and COVID-19. What the hell is going on?
People are losing their lives. People losing jobs. People are rioting.
Businesses have closed down. Some for good. To say the economy is in shambles is an understatement.
But stocks seem good as gold?
- We’ve got the worst virus since 1918.
- The worst economy since 1930.
- The worst race riots since 1967.
Yet the S&P500 is up 42% since its March low! (Now just 5.7% off its all time high)
Do stocks reflect economic reality? Apparently.
Do I believe they are currently? Not really.
“The market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”
Seth Klarman – Margin of Safety
Are emotions and unrealistic optimism driving markets now? Maybe.
But what the hell do I know? I’m a student.
I think it’s interesting to look at both sides of the argument. Because maybe then it might be more tolerable seeing why the market is doing the opposite of what you think it should.
The Argument for a Rising Stock Market
When people say “don’t fight the Fed”, it’s not entirely in jest.
Daniel McMurtrie wrote about the bull case for stocks right now. And it raises some good points.
Fed Stimulus is to be expected from investors from now on. Anything less would be unimaginable. So holders are counting on the Fed stepping in whenever there’s a crisis.
Hence, may as well buy if the Fed’s got your back.
Capital markets, on the whole, are still extremely accountable to those companies looking for debt and equity financing. If you’ve been following, ASX companies have been on a raising spree of late.
And I don’t blame them. Better to raise capital now and not need it, than need it later on and not be able to raise it.
General market participation could be a factor too. Overall more people than ever are participating in the stock market. Robinhood and other zero commission brokers are making it more accessible than ever before for people to invest.
Just look at the Daily Average Revenue Trades.
Even the fact there’s no sport on could be a factor. Usual punters could see the stock market as the next best thing. Getting their fix from YOLO’ing SPY puts.
“The demographic of Robinhood’s customer base is similar to that of a sports bettor… 43% of North American men aged 25-34 who watch sports also bet on sports at least once per week, and that’s the same group that has flocked to Robinhood”
From NetInterest
I’ve previously written about how things will return back to normal. And it might even return back to normal faster than we all expect.
The Argument for a Lower Stock Market
As listed above. The economy in struggle town. The highest unemployment rate in the history of official government data (started in 1948). People dying from the virus. Protests in the US.
Maybe if the market was flat or down it would be more understandable. But it’s near all-time highs. A 37% gain in the S&P500 since early March. I do feel like I’m on some crazy pills.
Maybe I’m just missing something that everyone else is seeing.
Maybe I’m too pessimistic.
Maybe I just have no clue.
Going Forward, What to Do?
With respect to how the future will play out, I’m proceeding with caution.
I don’t know what will happen. And I’m not in the business of making forecasts. But I do believe in the idea that the future is a range of possibilities and you should weight the probabilities.
You can’t predict, but you can prepare.
So whilst I am being cautious, I know full well the market could continue to rise based on a number of reasons. Doesn’t even have to be a reason I’ve listed. But I (think) am prepared for both the possibility of a quick bounce back to normal, or the dead-cat bounce into further turmoil.
Failing to prepare is preparing to fail.
My one big takeaway from all this is, I don’t know. I don’t know anything really. I’d like to think I have an idea. But I don’t.
All you can do is prepare, hope for the best, and adjust according to the situation as if unfolds.
What else can you do?
I can understand being bearish. I think now I can (better) understand being bullish.
I do believe things will get better. Otherwise, I wouldn’t be an investor.
But I think things can get worse before they get better. We might just be in the eye of the storm?
“Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.“
Jason Zweig
Disclaimer: I’m not 100% short stocks. Neither am I 100% long. I’m at a happy medium where I’m comfortably invested, yet hold enough cash should I see more opportunities. Whether it rockets up or crashes down, I’m prepared for either situation I think (famous last words).
