Markets from a year of pandemic

We are now a full year into the coronavirus pandemic. Hopefully this is the last full year we will spend in a pandemic-driven economic and social shutdown, but it depends on variants, vaccination rates, and other factors beyond the financial world. That said, now is a good time to look back on the year and the experience gained from an unprecedented year spent during a global pandemic.

Main takeaways

  • A year spent during a pandemic limiting economic activity has reminded many investors that the market is a collection of our hopes and fears rather than just a function of basic data.
  • Technology stocks have been among the biggest recipients of the pandemic, as investors sent many of them to rise ahead of the market in the past year.
  • The most important lesson in the pandemic for investors is that it is incredibly difficult to plan the market, and closing during a sale often does more damage to your portfolio in the long run.

The market is a beast in itself

Investors have long known that the market and the economy are not the same. The relationship between the two waxes and decreases as far as strongly correlated they are. There are times when events in the economy can have an immediate market impact as well as times when events in the market can have an immediate economic impact. More often, however, the market is trying to look ahead to where the economy is. This is a double-edged sword, as the market sometimes stumbles upon looking too far ahead when there is a more immediate surprise in the short term. COVID-19 has brought this trend into sharp focus.

In March 2020, as the coronavirus began to spread globally and force more nations to be locked in, the market experienced a sharp decline that negatively affected almost all sectors. Since then, the economic reality remains challenging, with economies striving to stay open while also trying to keep COVID-19 at bay until vaccination rates clear the thresholds for herd immunity. Looking at the market since March 2020, however, it is assumed that coronavirus was resolved. This bullish sentiment towards economic realities serves to remind us that the market is a fusion of investor sentiment as much as basic data.

Yes, it seems crazy that equities have been on a tear with economies struggling with lockdown-induced unemployment. However, many investors are watching stimulus and erosive printing presses return to safer areas such as bonds, so they start betting more on the future recovery. This in turn pushes stock values ​​and draws more attention to market returns. How this cycle accelerates, or whether it slows down the real economy to catch up, will be one of the biggest stories of the future.

The pandemic is an accelerator

An accelerator accelerates natural processes, and the pandemic has done something very similar to that of trends that were already underway. We looked at this specific feature of the pandemic a few months ago and noticed how it pushed companies further down the paths they were already on. Business-wise, the pandemic has certainly accelerated the need for automation, and it will be a multi-year theme similar to big data and cloud services. We will also see accelerated investment in the virtual infrastructure for large companies and organizations as they seek to deliver more of their customer and employee-facing services digitally. Microsoft Corporation (MSFT) is already leaning towards this trend, Like all other technology companies whose tools were adopted much faster as a result of the pandemic.

Of course, the rapid aspect of the pandemic is not only on the positive side. The pandemic shattered a number of industries, including travel, the oil and gas sector and large parts of the commercial real estate sector. Of these three, the travel industry has the best argument that the pandemic is the most important problem it faces due to the unique problems it introduced. While these issues will take time to resolve, it is reasonable to expect a rebound to the pre-pandemic level in the long run.

For oil and gas and commercial real estate the pandemic piled on some existing headwinds facing these industries. Commercial real estate, for example, has seen its base of traditional retail struggle due to online competition and now its equally important subsector of office space faces challenges from technology opportunities opened up through the pandemic. That problems facing oil and gas before the pandemic was even more frightening, with capital becoming scarce due to environmental, social and governance (ESG) movement and stricter regulation of new projects in most regions of the world. The pandemic and the accompanying lockdowns greatly reduced the demand for fuel, forces producers and OPEC to limit production. The road ahead of both commercial real estate and oil and gas will involve hard revolutions and require a lot of rapid innovation because the pandemic brought these issues to the fore much faster than any of the industries expected.

Fear and hope fall unevenly

When looking at the pandemic so far through the lens of the individual stocks as opposed to the market as a whole, one thing stands out how fear and hope both play to extremes. A year ago, the unknowns around COVID-19 were significant. We did not know how bad it could become globally, and probably more importantly, we did not know how long it could last. While our answers to these questions are still far from complete, we have a much clearer picture a year later, with a number of vaccines already in use. In the period between the steep March sale and the market-moving announcement in November by Pfizer Inc. (PFE), we saw very extreme fears and hopes play out in the market.

First was the fear that sent markets to broad sales, and even sent tracking indices such as S&P 500, that Nasdaq Composite, and Dow Jones industrial average (DJIA) down by two digits. This means that some of the world’s highest stocks sold at a significant discount. Apple Inc. (AAPL), for example, fell over 20% from February 2020, and from that fall it is now up over 120% a year later – meaning we all rolled through pandemic news updates on mobile devices in March while selling shares in one of the major names in the industry as if the pandemic would harm Apple’s business significantly. Of course, there were some stocks like Walmart Inc. (WMT) that ran through the wide sale because of their well-known durability, but there were many more deals to get when investors ran to the exits.

Fear, however, appears to have a shorter shelf life in the market compared to hope, and in late spring, enthusiasm looked up at a number of stocks that continued to be pandemic lovers. Netflix, Inc. (NFLX), Zoom Video Communications, Inc. (ZM) and Peloton Interactive, Inc. (PTON) started all. The enthusiasm was so high that trading in ZOOM tickers belonging to Zoom Technologies rather than Zoom Video had to be stopped to prevent more investors from piling on an earful.

An unpleasant amount of stocks – especially technology stocks – have gone into three-digit tears over the past year. One of the most surprising valuations belongs to Tesla, Inc. (TSLA). Tesla joined the S&P 500 during the pandemic and has not been reassessed by the market despite established car manufacturers making concrete moves entering the electric car market Tesla was pioneering. Some of these pandemic sweethearts may well live up to these valuations in a post-pandemic world, but it will take a lot.

Individual investors emerged in force

The malls may be empty, but the market somehow feels fuller than ever a year within this pandemic. That short squeeze that occurred in GameStop Corp.. (GME) stocks caught a lot of attention, but the wave of individual investors hitting the market was already noticed much earlier in the pandemic. App-driven investment and people with unexpected amounts of time on their hands have led to more people being actively involved in the stock market. Individual investors have helped rally tech stocks to new heights and, as with GameStop, they have even forced professional investors to capitulate in their positions.

There is a lot of toothache and worry about the chaos that individual retailers can unleash by loosely coordinating action through social media. This is likely to be a short-term growing pain, and the worry is a bit exaggerated by the attention to the Reddit rally. In the long run, it is an overwhelmingly positive development to have more investors in the market taking control of their portfolio. After all, this increase in individual investors takes place in the context of a rapidly changing landscape of personal financing. The pandemic has pushed many industries towards more automation and intensified trends that increasingly see more people dependent on concert finance to collect an income that traditionally comes from a job. The market can be part of the overall income picture over a lifetime, as the individual traders develop into experienced investors.

The bottom line

The pandemic has been many things on the market. It has hammered some sectors and helped others. It has seen the rise of individual investors as a market force. It has also reminded investors that the market itself is a reflection of hope and fear rather than what is actually happening in the economy.

However, one of the most important takeaways for investors from a year of pandemic is that timing the market is and always has been an almost impossible task. If you have to keep market instruments, you better keep your money in the market instead of trying to jump in and out based on forecasts and short-term events. If you held stocks through the dip in March or even continued to invest regularly in broad market indices, a year of pandemic probably has not been bad for your portfolio returns. It may not compensate for what a year of limitations and lockdowns has done to your personal situation, but we take what we can get in these unprecedented times.

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