Alchanati Campbell & Associates
The business cycle is very simple to understand. It goes from expansion to peak to recession to trough, and then it starts over again. Sometimes in more severe cases, it goes from expansion to peak to recession to depression to trough, and then it starts over again. In March when the stock market caught up with the health crisis but led the economic crisis, it corrected into a recession. Most people were predicting it would be a short-lived, “V-shaped” recovery. They were right. This correction allowed asset prices to adjust closer to their true valuations. Now what we are seeing is something even scarier. Irrational optimism, retail investors with their stimulus checks, and the Feds with unlimited QE have brought the stock market almost back to their initial highs. The graphics below show a couple of outstanding data sets. The first is how uncorrelated the stock market is to their 12-month estimated earnings per share (EPS). The second is how many retail investors have been active in the market recently. The third is how much the Fed’s balance sheet has grown since this has all started; over $7 trillion.
The risks I fear the most are: a wave of new confirmed virus cases, more speculation in vaccines and less successful trials, an increase in white-collar workers becoming unemployed (unemployment insurance can not cover their lifestyle expenses), and the credit market bursting due to more bankruptcies, more credit rating cuts, and negative interest rates. What will happen when the Central Bank tools run out or more importantly, what will happen when their practices and tools stop working the way they are supposed to? The year isn’t even halfway over, and most lagging economic data still needs to be released like GDP. Only time will tell, but this market is looking more like a bubble every single day.
Uncertainty brings about confusion which brings about fear which brings about stagnation which causes missed opportunity. What we are thinking about now is what asset classes will be the most valuable in a couple of years and where will value come from? We are looking at REITs and other high-dividend paying stocks. With stock-buybacks decreasing and inflation being forecasted, your return will be dismal. Where will you get the extra percentage points to create Alpha?
Hindsight bias sucks because you can not use it, but great to learn from. From learning about how asset classes reacted to the current and past market conditions, I have learned many things:
- I would have shorted volatility when it spiked.
- I would have bought into tech, e-commerce (Amazon, Shopify, MercadoLibre, Alibaba), and retailers selling essential items (Walmart, Target, Costco).
- I would have bought more Gold.
- I would have shorted restaurants and airlines.
- I would have bought the March lows with more leverage than I did.
- I would have sold out of my VIX positions at the highs in the 70s. (^VIX)
- I would have bought Bitcoin lows in the $4,000s.
- I would have bet against the biggest hit foreign economies (Brazil, Italy, China, India, Russia, and the U.K.).
- I would’ve sold TVIX at a higher price above 700. I waited too long and got greedy, which I should not have done. I then would’ve bought back into the blue chip stocks, knowing that eventually the market would recover as it did
- I would not have watched the market everyday, because the past few months have all been give and take. Trump says something positive and the market goes up, new data says something negative and goes it back down. Rinse and repeat.
- I would have put more time into researching companies with strong financials to last or even thrive during a pandemic.
- Sold out of more of my less risky assets and allocated more funds to speculative stocks.
- Followed more pharmaceutical companies to capitalize on news of vaccines or new treatments.
We have learned much more and moving forward we will use what we learned to make smarter, more profitable decisions.
The ACA Foundation
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.