2020 is a year to be remembered. 2020 is the year COVID-19 shook the world (technically it started in 2019, but took until around Feb or March 2020 for the US to take is seriously, if you’d like to call it that). It’s also the year that Kobe Bryant died in a helicopter crash, the year of Black Lives Matter protests, and hopefully the final year of President Trump in office. As gloomy and hopeless this year was, the S&P has recovered just a few points from the previous all-time high after a sharp 35% drop from February 19 – March 23. For comparison, the financial crisis of 2008-2009 incurred a 57% decline in the S&P from Oct 10, 2008 – March 6, 2009.
I graduated in 2008, and I did not have a job lined up after graduation (to be honest, I didn’t know what I wanted to do after graduating and could have worked a lot harder to find a decent job). I’ve been interested in the stock market probably since I was around 17 or 18, and of course had virtually no capital to invest or play with then, but enjoyed (and still enjoy) keeping up with market news. As one could imagine, the majority of news and views of the effects of the financial crisis portended doom and gloom for the economy and stock market.
However, betting against the economy was the wrong move after March 2009, although bearish views were preached seemingly everywhere, and gold was touted by a few investors as a good hedge against the collapse of the financial system (which I believe it is), regardless of a deflation or inflation scenario. Gold did do well, but up to a point (let’s say Sept 5, 2011 where the price peaked at $1,920 / troy oz). After that, we saw a 45% decline to $1,046.54 on Nov 30, 2015. If you were long gold, you would have been crushed. I admit that around 2011, I was super hesitant about the stock market given the magnitude of the earlier collapse, and as I understood more how the financial system worked (fractional reserve banking), and what quantitative easing was (money printing), it was not possible for me to turn bullish without a better guide around the bullish view and reconciling with the seemingly fragile state of the economy, rigged nature of the markets and financial system with the Federal Reserve as a backstop and lender of last resort.
It took me years to turn bullish or just give in and put more money into stocks for retirement at the very least. I learned my lesson the hard way–don’t bet against the Fed. BTFD. And, as interesting as gold was as a trade or investment, make it a relatively small percentage of the asset allocation (no oversized bets). I now understand that gold should be thought of more as an insurance policy, and frankly does not compare to owning the stock of a company that can grow much more (i.e. FANG would have been a juicy investment).
Fast forward to 2020, where the S&P 500 enjoyed a 405% increase from the March 2009 low. Then a pandemic is beginning and people are dying from a previously unseen virus, and there is no known treatment or vaccine. Cities and countries are going into some form of lockdown or shelter in place. The market is beginning to see severe declines, but this time, I’m a bit more prepared and sell off a good chunk of my investments before we hit bottom. I buy a few puts here and there on SPY because now I’m thinking we’ll go down further, but I’m losing money because volatility is so high, and stocks aren’t going down further. I look for investments that could do well once this is all over even though everyone is saying we have more downside left to go. On top of that, I subscribe to high quality research which sees the market as a glass half full. It reinforces my instinct to buy some stocks. I do exactly that, near bottoms, and just wait. Using some technical analysis techniques I learned over the past two years or so, I have target prices for two big trades I’m in. Over the next few weeks I’m anxious, and the psychological effects of making large trades or bets unfortunately shows up in my relationship with my spouse.
Thankfully, over the next few weeks or months, the trade plays out my way, and I’m rewarded for the risk I took. Feeling confident, I enter more trades, some of which are options trades, which don’t play out the way I had hoped. Luckily, these additional trades were much smaller and didn’t do significant damage to the earlier gains.
Enough story telling, that’s not the purpose of this post. The purpose is to communicate the value of investing in high quality research. I’ve paid for various newsletters, and had mixed results. Some folks are were bearish and overly cautious and talked more about scenarios years out vs focusing on the here and now. I found one that so far has been working very well, and the research is much more analytical and less biased than others I’ve subscribed to. I’ve learned that some major factors are age demographics and population size. The more people there are with purchasing power, the more likely the stock market goes higher (because more people buy stuff). It’s one very simple framework, and of course just one factor of many others.
Despite the fear of death and uncertainty about the future, life went on. People need groceries. Most people generally still had to work, whether at home or at their work place. Interestingly, many companies did spectacularly well because of the pandemic (Slack, Zoom, Amazon, and many others). Many also did poorly and small businesses in particular were more likely to go bankrupt, especially if they were not lucky enough to get a loan. I wish I could say I got in on the stocks that did well because of the pandemic, but at least I was able to capitalize on some other opportunities (there were many opportunities in general, but one only has so much time to spend researching them while working a full time job).
Even in August 2020, the mainstream media cannot really explain why stocks have rebounded and still portray how bad things are right now (which they are, undoubtedly). This leads to another important fact about stocks. Stocks look forward, and reflect future earnings. If a company has a few bad quarters while the virus persists, but afterwards, when the virus is gone, the company has earnings go back to “normal” (after factoring in inflation I suppose), the price today factors in those “normal” quarters as well. In a recovery, earnings might be expected to be even better than “normal”, and the price today would reflect that as well. That’s why there’s a discrepancy between the market and the present day reality.
I’ve only come to learn this from the research I subscribe to. It’s really quite basic, and I like the how rational the analysis is. Interestingly, one major reason stocks are high is because of the Fed intervention and the increase in money supply. I haven’t really kept up with the Fed’s operations, and haven’t heard much in the media or Twitter about it other than the Fed buying corporate bonds, but I have seen a chart of the increase in one metric of the money supply, and that is definitely also another way to reason about why stocks skyrocketed and may continue to do so. I suppose those two rational views coupled with the bearish sentiment is actually quite bullish (the inverse of sentiment can be a good indicator of market direction).
It’s hard to believe that stocks rebounded and may even continue to do so, but I’m not a professional investor, and how I feel about the economy frankly doesn’t matter. I have already suffered from lost opportunities in the market after the financial crisis, and I will not miss this next opportunity if experts that I pay good money for are bullish.