When we started our careers in the investment industry over 20 years ago, we would have never predicted writing something called a BLOG, let alone a Blog with this title. Well…. here we are.
Stock markets around the world have roared back after the significant declines of February and March which is leaving many people confused. How could the market bounce back so significantly if there are so many negatives still hanging in the balance? COVID 19 is still a significant problem without a vaccine. The social upheaval in the US, staggering levels of job losses, plunging economic growth and a US election coming up later in the year that will again push the definition of polarizing.
There are millions of young adults, being isolated at home and losing one of their favorite passtimes, betting on sports. Many of them have chosen to fill their days betting on stocks instead of the upcoming NHL, NBA, or MLB games. Robinhood is a relatively new on-line trading platform that offers no cost trading. They have added close to 3 million new accounts so far this year with the average age of their investors being 31. Most of these investors have no prior experience with investing and are bringing some interesting philosophies to the market.
YOLO, which we had to look up, is You Only Live Once. As a general motto in life, it makes some sense but in an investment context it means swinging for the fences by buying in to companies whose stock price has the potential to explode to the upside. Unfortunately, stocks that have explosive upside have almost the identical characteristics to those that go to $0. Should Nikola, the new electric truck company be trading at a price that puts its market value close to Ford having not delivered a single vehicle? Doesn’t make sense to us but…YOLO.
FOMO is the Fear of Missing Out. Simply put, if your neighbor makes 50% on a stock over a few days, it is difficult not to think that you are missing out on easy money. The most famous incidence of FOMO was the 1634 Tulip craze where the price of Tulip’s went parabolic because nobody wanted to miss out. That didn’t end well, but it is a useful lesson and something to think about. It is important not only look at how a company can grow but also the price you are being asked to pay. What price should you have been willing to pay for a Tulip?
In our opinion, much of the market’s rebound has not been driven by new retail investor participation but on the margin, it has been a powerful force.
The difficult part of figuring out this market is weighing the negatives with the positives. The positives are also plentiful and are worth a quick rundown as they are significant.
- Governments around the world continue to add stimulus to their economies. Interest rates are low, government programs are bridging income gaps, infrastructure spending is up, and money supply is growing. In the long run we will have to pay for this but in the short term you never want to fight the Fed.
- There are several companies who are aiming to distribute a vaccine for COVID 19 sometime in 2021. Not immediate relief but promising.
- Record amount of cash on the sidelines. You cannot keep up with inflation by staying in cash. Some of this money will move back to the stock market in search of growth.
- We have learned a lot from this initial shut down due to the Virus and are much better prepared for a second wave if there is one.
Nobody knows exactly how things are going to unfold but we are optimistic than innovation and the human spirit will win the day.
Stay safe and please reach out with any questions or comments!