Lessons investors have learned during the crisis
By Professor Pierre Fournier
So, summer is largely over and students are (sort of) back to school. In a COVID-19/lockdown world, nothing is "normal" anymore. Certainly not the stock market, which continues to defy gravity, and — according to some — sanity.
One thing I like about the stock market is that there is always something to learn. Even after twenty-plus years in the business, one can always discover new ideas and themes. Looking back at the past six months, let’s look at a few things investors may have discovered as the world dealt with the pandemic and its repercussions.
Tech stocks aren't the biggest risk
Investors old enough to remember the 2000 dotcom boom and the biggest casualties from the 2008 global financial crisis have an inherent belief that technology equals risk.
But as stock markets plunged around the globe due to Covid-19, tech stocks remained some of the stars of the show. One important lesson from the pandemic has been that technology stocks are not necessarily the riskiest part of the market during a downturn.
Shares in household names such as Apple, Facebook, and Google have performed relatively strongly, highlighting the more central role their products and services are playing in our lives. It is also important to underline that many of these companies generate a lot of cash and have impenetrable balance sheets.
While there's no knowing what the future holds, it may be that habits formed during lockdown – such as holding more meetings remotely – will continue after life returns to normal, further boosting the tech sector.
Fear can be the enemy of growing wealth
It is a well-known cliche that markets are driven by fear and greed. Veteran investor Warren Buffett says the secret of success is to be greedy when others are fearful and fearful when others are greedy.
The sharp falls, and similarly sharp recoveries on the stock market during the pandemic, have borne out Buffett's wisdom.
The trajectory of world stock markets in recent months has shown little mercy to those who are fearful. When things go wrong, our emotions take over, and fear sets in. It's a survival instinct and we are programmed to take action. For example, if the boiler in our house breaks, we call the plumber, the boiler is fixed and we move on.
Selling an investment portfolio is likely to provide instant gratification... but it's nearly always the wrong thing to do.
When stock markets fall, the same instincts are triggered. We are losing money and want to stop the losses. For many, the first thought is to sell up and move into cash.
Selling an investment portfolio is likely to provide instant gratification. We feel better that we've stemmed the losses and maintained what's left of our hard-earned investment. But it's nearly always the wrong thing to do.
While some stock markets fell by over 40 percent earlier this year, many recovered some lost ground very quickly. So investors who held their nerve by remaining invested, or even adding money, have done better than those who withdrew at the height of the panic, crystallizing losses.
Watch the VIX
In February, many investors had never heard of the VIX volatility index. But in March, all that changed, as the VIX spiked to a record of 84, even higher than the levels of 2008. The VIX index confirmed to investors that, yes, things were very bad in the market, indeed. But, just like in the 2008/2009 crisis, the spike in the VIX corresponded very closely to the lows of the market, as “panic” peaked. It is not a perfect indicator but is a very good gauge as to what’s going on in the world. So, the next time you are thinking of selling into a panicked market, check the VIX first. Is it over 60? Maybe selling then is not the best strategy. Is it over 80? Well, maybe then it is time to buy, instead.
Governments have learned from prior crisis events
Now, we are not usually one to praise governments, but we will give credit where credit is due. Both in the U.S. and Canada, governments very quickly responded to the COVID crisis. Sensing it was, hopefully, an event with a defined timeline, governments and central banks threw money at consumers and businesses. The plan was to ensure businesses and individuals could simply survive the events of 2020. Yes, deficits have risen and future taxpayers are going to pay the price. But the alternative was a wave of bankruptcies which would have caused a domino effect — It simply would have been devastating. Sure, the stimulus is essentially kicking the can down the road, but at least there is still a road now. In prior crisis events, governments were too slow to react, and this made prior events worse than they should have been.
"K" shaped recovery
Since it became obvious the coronavirus pandemic would create a recession, economists have debated the "shape" of it, with big implications for the future of the economy. Would it be a "V" shape, with a rapid recovery, a "U" shape, with a softer recovery, or the dreaded "L" shape, with no recovery at all?
Economists and analysts use letters like "V", "U", "L", to describe their projections for the length of the recession and potential recovery.
A "V-shaped" recovery, for instance, is the most optimistic, as it suggests economic spending and employment will rapidly decline, but quickly pick back up like a "V." A "U" shape is similar but suggest the period of unemployment and low economic activity will remain longer than a "V" recovery.
"L" and "I"-shaped recovery outlooks are much direr, suggesting the high unemployment and low spending will have other ramifications, like cause debt defaults and overwhelm health systems.
A "K-shaped" recovery is somewhere between a "V" and "L" — depending on who you are. Industries like technology and software services have recovered from the industry and begun re-hiring, while the tourism, entertainment, hospitality, and food services industries have continued to decline past March levels.
What does a "K" shaped recovery mean for jobs?
In March, following the rapid spread of the coronavirus that prompted officials to shut down businesses and schools, million people filed for jobless claims.
While the record job loss hit the travel and hospitality industries, some economists assumed the economy would bounce back once businesses reopened. The result would have resulted in a "V-shaped" recovery, where unemployment and spending drop sharply but pick back up in a short period of time.
But many countries have yet to control the virus to the point of safe reopening. The stagnated recovery has meant the restaurant and travel industries have continued to decline, as more and more chains and restaurants have gone bankrupt. While job growth has picked back up slowly, the unemployment rate is still very high.
Disclaimer: This article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making and investment based on your own personal circumstances.