Trading nonsense

Opinion

Hey there, time traveller!
This article was published 20/06/2020 (1013 days ago), so information in it may no longer be current.

The stock market has made little sense these days.

Albeit it hasn’t made a lot of sense for much of its history.

That’s to be expected given it’s a diverse brew of greed, fear, stupidity, ingenuity, rationality, and just about every other human characteristic.

Yet stock markets have been particularly kooky of late. You can thank COVID-19 for that.

They can surge for weeks despite unemployment soaring to levels unseen since the Great Depression. Daily deaths in the U.S. were in the thousands for much of April. Yet after a 21 per cent dive in February and March, the S&P 500 had one of its best months on record in April.

And the NASDAQ — the tech index, for the most part — recently reached all-time highs in early June.

Then again, the markets also reflected a lot of anxiety, particularly in recent days over fears of a second wave of disease (even though arguably we’ve never got past the first one).

Much of the upside is the result of quick action by central banks. Lowering interest rates to near zero, while buying up government bonds to flood markets with cash (a.k.a. liquidity), have coaxed investor money into stocks, says Ian Riach, portfolio manager with Franklin Templeton Multi-asset Solutions.

“The old adage of ‘Don’t fight the Fed’ arose again just like it did during the financial crisis in 2008,” he says, pointing to the similar measures used during the Great Recession that lifted markets out of the rubble despite plenty of gloom hanging around.

“The point that there is really nowhere else to go because bond yields are so low has a lot to do with it.”

Of course, investors also look to the last crisis, and perhaps see a buy low/sell high opportunity. Indeed, discount brokerages have seen record business levels since the pandemic. For instance, Qtrade — one of Canada’s more popular online brokerages — has seen twice the trading volume in the last two months.

“It’s an inverse curve,” says Christine Zalzal, head of Qtrade. “Every time there is a situation in the world that impacts the markets, and creates volatility, there is a direct… surge in demand for online brokerage services.”

What’s more is Qtrade recently surveyed clients, finding 11 per cent expect a quick market rebound within a year. At the same time, nearly four in 10 see incredible buying opportunities and almost 30 per cent believe they can “make a killing,” its report notes.

Then again, the survey also found nearly half fear it would take a long time for markets to stabilize.

This divergence in responses illustrates dividing lines among investors and society overall, particularly in the U.S.

On one side are those who believe the world should get back to business, COVID-19 be damned. The other believes the virus isn’t done by a long shot, and normalcy is many months, if not years away.

These competing views roil the markets from one day to the next. So when new data about hospitalizations from coronavirus are rising in many U.S. states, markets tend to dive. Yet, oftentimes, stock prices rebound the next day, as the optimists buy in.

Then again, markets’ resilience is largely due to a handful of U.S. technology and consumer companies that have remained profitable through the lockdowns with millions working from home. President and CEO of Mackenzie Investments Barry McInerney notes the upside has been driven by the FAANGs — Facebook, Apple, Amazon, Netflix and Google (Alphabet). You can also add Zoom, Microsoft and a few other tech firms involved in facilitating the virtual worlds we now inhabit more than ever.

“Even last year, half of the 30 per cent return was driven by these stocks.”

In fact, these firms now make up by market capitalization (the total value of all their shares) a large fraction of the S&P 500, accounting for 20 per cent of the value of the index of listing many of America’s largest companies.

The same can even be said of the TSX composite. Our lone tech titan, Shopify is now the largest publicly traded company in Canada. McInerney says the value of the tech sector relative to the rest of the market is even higher than it was during the Dot-com bubble. The key difference today is these firms have growing revenues and profits (in most cases), whereas the Internet companies of the late ’90s and early 2000s were founded on aspirations and generated little to no revenue.

More broadly, you can expect more of the same regarding all of the above, Riach says.

“Markets tend to climb a wall of worry, and there are a lot of worries out there.”

It’s not just COVID-19. It’s Trump, trade wars, and protests over police killing minorities. Let’s also not forget the upcoming U.S. election, which promises to be weirdly different (to say the least) from past ones.

Then again, “markets seem to shrug all this off,” he adds.

So what should the average investor do?

Burying your money in a savings account likely isn’t a great solution if you need it to grow over time.

Nor is piling it blindly into the stock market.

If you have one, stick to your long-term plan. (If you don’t, now’s a good time to launch one.)

Stick to your asset mix of stocks and bonds, and rebalance them at least once a year. And if you put money into the markets monthly, continue to do so. Dollar cost averaging is the safest way to grow wealth long-term. That is as long as you also diversify your investments, across geographies, industrial sectors and asset classes, McInerney says.

No one knows what the next day holds.

But you can expect this: “The markets will be volatile for the foreseeable future,” he adds.