In recent years, whenever a disaster strikes the world, analysts claim that it is excellent for the capital markets.
As long as the COVID-19 epidemic continues along with the rise in the financial markets, meeting reality outweighs any risks.
Not a single person, without exception, was able to truly estimate the strength of the COVID-19 epidemic correctly. Earlier this year, before spreading around the world, some thought that most of the damage would be done to China. Others predicted a vaccine to be found and by summer, the COVID-19 will be long gone. There were many more predictions, all far from today’s reality.
The vast majority of forecasts were significantly optimistic about the current situation; Indeed, some virtuous individuals have argued that this is a significant and catastrophic event, but in most cases, there were economists who predict a crisis at any given moment.
Worse Than Expected – Better Than Expected?
There is a fundamental contradiction. It is difficult to explain how today’s COVID-19 reality is worse than predicted on January 1, 2020, and yet, the stock market is up swing.
So, What Makes the Stock Market Move Higher While We Move Lower Financially?
The current explanation is that the outlook for the future is much better, and the market sees beyond COVID-19. Let’s clear the explanation and return to what was predicted at the beginning of the year compared to the actual situation. In December 16, 2019, the American investment bank, Goldman Sachs, predicted that the S&P 500 stock index will yield a return of 7% in 2020.
As of today, in the middle of the COVID-19 storm, the S&P 500 index shows a 9% increase (adjusted for dividends) from the beginning of the year – and the hand is still out.
The Trend Is the Investor’s Friend
One of the first things soldiers are taught before training in the field is: Do not pee against the wind. In general, the most important rule is:
- Do not go against the wind.
This rule is 10x more applicable in respect to capital market investments. One can look in complete perplexity at the capital market phenomena the value of companies that have a significant economic difficulty.
For example, the clothing brand Limited Brands (NYSE: LB), which owns,
among other things, the Victoria’s Secret brand, was forced it to sell 55% of the Victoria’s Secret brand at a reduced price. During the spread of COVID-19, the buyer, the Sycamore Hedge Fund, withdrew from the deal.
Coronavirus did not provide positive traffic in Limited Brands stores and online sales did not compensate for that. Limited Brands’ sales totaled $11.3 billion in the 12 months ended August 1st (see chart), compared to $13.1 billion in the same period last year. In response to COVID-19 and the decline in sales, the company’s shares jumped 72% since the beginning of the year and by almost 400% from the level at which it traded at the height of the COVID-19 crisis in March.
When everyone buys, it’s not necessarily a good enough reason to buy, but it’s definitely a great reason not to try to go against the flow and bet on declines in the markets (for example, using short positions)as the loss can then be significant.
The New Money in The Market: Gambling or Investing?
One explanation for the new amounts of money flowing into markets beyond central banks is the lack of sporting events. In the absence of football, basketball, horse racing, etc., sports betting does not exist either. Some economists argue that the money previously diverted to sports betting is now being diverted to “capital” gambling in the capital market because it produces the same adrenaline of tracking a stock price on screen along with the fear of loss and the hope of high profits. At a time when new money is flowing into the capital market, when everyone seems to be buying, do not ask why and do not try to act against the trend.
Going against a trend guarantees loss.
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We are in an unclear period in the capital market – this period will not include a red warning light before a market decline. As evidence, months ago the U.S. markets fell by about 7%a day after the capital market seemed to be recovering fromCOVID-19.
Meanwhile, gamblers who have been betting on trend stocks have posted phenomenal returns, but only how it was in the 2000s before the Nasdaq bubble burst. Since savings are supposed to be a safety cushion for a more stable future, it is worth investing in caution, and not together with “investors” who, until yesterday, “invested” in casinos.
At some point, investors will also be forced to look at reality and realize that it is different from what they expected. COVID-19 has not passed from the world. The financial markets continue to rise and the scenario of encountering reality increases.
Will the economy at the end of Coronavirus be a speeding sports car or a human who just wants to return to work after a long period of unemployment? Only time will tell.