|
13 May 2020
Something strange is happening in the stock market. While earnings among companies in the S&P 500 index are down 25% this year, the index itself is down just 10%. Meanwhile the broad economy is in dire straits, with unemployment having jumped from 3.5% in February to 14.7% now.
What's happening? It may be that the 11-year bull market that just ended has trained investors to see any and all trouble as temporary. It may be that investors are just willing to bet on America. This optimism bias, as I'd call it, is a dangerous thing right now.
We are in a new normal of uncertainty. With Covid-19 still raging in the United States, frightened consumers are, for the most part, staying home and keeping their wallets shut. If the country re-opens too quickly, without proper precautions in place, we could be in for a second wave of the outbreak very soon. Some promising treatments are being developed for those who fall ill, but a vaccine is months if not years away.
That all adds up to uncertainty for businesses. Certain companies have little or no revenue right now. Many have stopped offering revenue projections altogether because it's just not clear when consumer demand, which is responsible for 70% of the U.S. economy, will pick back up.
And yet investors are buying as though Covid-19 were just a speed bump in the rearview mirror. Even technology stocks, which might seem to be immune to the troubles faced by restaurants or concert venues, have been bid up to an irrational degree.
My view is that we're in uncharted waters, and that while there are still buying opportunities, extreme caution is warranted. When markets drop again, and they will, I'll be looking at selected companies in the technology sector. I'll consider buying consumer preferred retail such as Amazon, and discount retail. Cloud storage and data provider companies look promising, as do companies that support and profit from these businesses.
I'm absolutely staying away from travel and leisure, non-discount retail, oil companies with lots of debt, and most real estate. And while some badly beaten down stocks in the airline and hospitality industries may bounce back over the long term, there is very, very little visibility into the future of those industries right now, so I'm staying well clear and not adding to any current positions.
There's one more reason people may be plowing money into the market: Fear of missing out on the rally that's taken place since the crash back in March. Don't worry if you've been on the sidelines; you'll still have a chance to make money. Prices will fall eventually because rationality will win out.
For now, keep cash available for opportunities that could come at any time. Be patient. Even Warren Buffet, one of the greatest investors of all time, recently said that he doesn't see anything worth buying at current prices. And when buying opportunities arise, be ready. Please don't hesitate to contact me if you'd like to discuss your investments.