The year 2020 certainly didn’t start on the right footing. The health crisis is turning out to be much worse than many experts expected and with the prolonged lock-downs and stalling of economic activities in many countries, IMF is not projecting a pretty global economic outlook.
Why Has The Market Recovered So Fast In March?
Both the US and Singapore markets plunged over 30% in March 2020 but have since recovered about 30% and 16% respectively.
Many analysts say this is a V-shaped recovery, so have you missed the boat of profiting greatly by buying low and selling high? I personally don’t think so and I will explain why in this article. I think there will definitely be a second crash coming and it may even be worse than the one in March.
The market rebounded largely due to a few key reasons:
- Fed and other central banks embarking on huge quantitative easing, presenting ample short term liquidity to ease credit pressures
- Low interest rate environment, and investors hungry for yields rushing back to the stock market
- Fiscal policies by governments pumping trillions and billions of dollars into the market
- Hope of good developments around a vaccine or effective anti-viral drugs
- There is probably also an effect of FOMO (Fear of Missing Out) from inexperienced investors rushing to buy, especially now that they are working from home
The hard truth is that we are experiencing a once in a hundred-year event and life for a while is not going to be the same as pre-Covid-19 days.
The virus may not just disappear. The medical solution is a vaccine that truly works. The medical field has advanced in leaps and bounds but the very optimistic hope for a vaccine is perhaps 18 months from now and hopefully the virus does not mutate too much during this time.
With some successes in controlling the number of infections through lock-down measures, safe distancing, countries and cities all over the world are now easing the lock downs gradually and opening up the economies.
What remains to be seen is whether economies can re-open safely with no major second-wave infections. China may have the right formula doing this but it is too early to tell and there are cautionary remarks by experts.
My hope is that short of a medical solution, we will find a New Norm so economic engines can be re-fired sooner than later. Even then, you know some industries like airlines, cruises, sports, tourism, hospitality, traditional retail, F&B, entertainment etc are still in trouble. The loss of jobs will be tremendous and this will in turn affect other industries.
As such I think when more bad news such as atrocious unemployment numbers, GDP contraction, more bankruptcies, earnings which don’t meet expectations are reported, the stock market will reflect the grim realities again.
If large scale second waves of infections occur, the situation will be worse.
Market Is Already Expensive
What if I am wrong? Well, the market is very expensive anyway, so while you stay invested, the wise thing to do is to have a large proportion of your portfolio in cash.
One way to assess whether the market is expensive or not is to look at the Buffett indicator. This is the percentage of total market cap (TMC) relative to the US GNP and according to Warren Buffett is “probably the best single measure of where valuations stand at any given moment”. The value is 134.3 as of May 18.
Is is definitely significantly overvalued at this moment.
However, while the general market is expensive, there are individual stocks which are undervalued. One such company may be Berkshire Hathaway (BRK) and there are many others.
What I Am Doing Now
I believe smart investment involves having a long-term perspective and to ignore shorter term market gyrations. I continue to invest in the market but demanding higher margin of safety. The other thing is to do dollar-cost-averaging.
I am also taking the time doing my research and forming my shopping list. We should think about impacts of Covid-19, the new norm and which industries and companies may thrive and which companies unfortunately will not survive this crisis.
These are 10 companies/ETFs which I absolutely hope to be included in my portfolio, some are already in my portfolio but I hope to accumulate more: Berkshire Hathaway, Facebook, Alphabet, Alibaba, Disney, Microsfot, FXI, KWEB, DBS and Capitar China Trust.
I also leverage on Options strategy to collect monthly cashflow income while waiting for some share price to hit my target levels. Below is part of what I do; it is a good way to generate annualized return of 12 to 24% with part of your idle cash.
Do join me for a Webinar where I will share my analysis in further details, how I do fundamental analysis, the financial metrics which matter to short-list a great company, how to do valuation and determine a company’s intrinsic value so you pay the right price for it.
Short analysis of why I pick the ten stocks will be covered.
Early bird registration is FOC. Register here.
At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.
Do leave us comments and feedback below so we can improve on our contents.
Please also follow us on our Facebook Page.