The Bumpy Ride Isn’t Over
Last week seemed like a game changer. At least at first glance. On Monday morning (11/9) investors got news of a COVID-19 vaccine that had preliminary data from human trials, and was found to be 90% effective. This was welcome news, and many stocks skyrocketed in response.
The market optimism was so overwhelming I had several stocks up over 20%! By Friday afternoon I was even seeing a weekly gain in some positions over 30%. Absolutely incredible!
While the stock market was relieved to hear the good news about a vaccine, the COVID-19 virus itself was setting it’s own record last week — 53 million infected worldwide. Record daily infections in the United States. Nearly 200,000 people infected in the U.S. per day.
What gives here? How could the stock market be so incredibly optimistic when the COVID situation and the economy is in such terrible shape?
While I’m all for optimism, I think we need to face facts — We’re not out of the water yet.
Expect Volatility
Monday was fun of course, but whenever I see spikes like this I try to remind myself that these are merely short-term fluctuations. NOT permanent increases to intrinsic value. We’re just as likely to give back those gains this week.
If you’re a long-term holder of shares (and you should be), don’t get caught in the hype. The stock market will almost certainly correct downward again, once investors realize how far-off the vaccine really is. There’s a tough road ahead.
Pfizer and BioNTech have stated they believe they can make 50 million doses by the end of the year. It takes two doses (a month apart) to be properly vaccinated, so that’s a mere 25 million people potentially vaccinated by the end of 2020.
That’s a drop in the bucket globally. According to the experts, it’s going to be months, possibly even a year before the average person can get hands on a dose of this amazing new vaccine. It may be late spring or summer before the vaccine is available to the general public, according to reports.
This means several more quarters of losses for hard hit industries. Theaters will continue to go empty, cruise ships will sit at port, and airlines will fly only their most profitable routes.
While Mr. Market was all optimism last week, the evidence suggests it’s going to take longer for the economy to turn the corner than Mr. Market thinks. You and I should expect significant volatility in the year ahead.
Expect Permanent Economic Change
Mr. Market, (by his very nature) is almost always forward looking. This tendency leads to moments of extreme optimism and relentless pessimism that is not always warranted. Recessions are (at times) deemed to be permanent, and economic booms are thought to be never-ending… until of course they aren’t.
Mr. Market is not perfect. He messes up sometimes, and may be missing the fact that our economy has permanently changed due to COVID-19.
We’ve all formed new habits in 2020. Some good, and some bad no doubt. It’s almost certain that a few of these habits are going to persist long after we’ve taken the vaccine.
I’ve said it before, we won’t be going back to the old normal. Even Jerome Powell (Chairman of the Federal Reserve) believes the economy as we knew it, might be over.
We live in a whole new economy. The changes are already starting to become visible:
* Physical retail shopping will probably never recover to the levels see before 2020. Online shopping got a huge boost from the pandemic and it’s unlikely to ever give that up. Malls and retail stores will continue to lose ground to online shopping.
* Travel is going to take a really long time to come back. Most travel businesses (if they aren’t profitable right now) will continue to bleed money for the foreseeable future. It’s going to take time to get 6 billion people vaccinated, and even longer for international travel to open up again.
* The movie theater business is almost certainly headed for a shakeup. Some theater chains will probably go bankrupt. With theaters being shunned by consumers, media companies literally have no choice but to release films to streaming services first (instead of theaters).
* Many companies are now allowing employees to work from home permanently. Or, they’re moving to a “mixed” model, with some time in the office and some time at home. Less office space will be needed in the future. Home office remodels will be popular. Office REITs will probably suffer.
* Thousands upon thousands of workers will not be able to find work in their previous chosen profession. Demand levels have changed around the globe. This means longer-term unemployment, training, and support are necessary to help displaced workers find new jobs. A second or third round of stimulus money could be necessary.
See what I mean? And those changes are only tiny scratch in the surface of changes that are taking place right now. There are probably dozens of changes I’m not seeing right now, that will effect both the economy and the stock market.
Change is never easy, but it does create opportunities. This new economy will create new winners and new opportunities amongst the carnage. Keep your eyes open and be ready to invest.
Mask-up and Hunker-down
I’m not saying all this to be negative of course, I’m simply saying it so we can prepare for what’s coming. Optimism is great, but everyone needs to prepare for a tough winter ahead.
While I wish I could believe in last week’s sudden “vaccine rally”, the facts point to considerable economic contraction in the months ahead. Don’t react to it. Maintain calm, and stay the course with your investing strategy (whatever that may be). We’ll get through this.
Staying healthy should be everyone’s first priority. So please — Wear your mask, wash your hands, and stay at home.
[Image Credit: Flickr, Flickr2, Flickr3]
Hope for the best / plan for the worst seems to be the wisest counsel right now!
And Mr. Market is prolly as confused as any of us 🙂
Indeed!
Thank you for posting this. I always enjoy reading your insights.
My pleasure Into the Fire!
I’m very optimistic about the vaccine. Moderna announced a great result. It seems the new RNA vaccines will be quite effective. Other companies should be able to make more vaccines too. It’s not just Pfizer. I think we’ll be back to mostly normal by summer 2021. Travel will bounce back very quickly. Everyone is sick of staying home. We want to travel. Retail shopping should also bounce back big. People enjoy shopping in person. I bet the Outlet malls will come back very quickly. The indoor malls, probably won’t survive. But yes, the economy changed forever. It’s tough for a lot of people.
I donno Joe. Maybe things are better in Oregon, but I look around and see a lot of closed shops. Only the big-boys and the takeout shops/food trucks look like they’ll survive in our area.
I don’t think folks appreciate just how powerful the $7+T of stimulus (between Congress and the Fed) has been in propping up the market this year (not counting the 2019 tax cut locking in an ongoing deficit stimulus). It will be interesting to see what happens when (or if) the market has to stand on its own two feet again and the US has to balance its budget. Even slowing back down to a $1 – 2T US deficit could cause a market pull-back…
Indeed. The U.S is hopped up on the equivalent of 8 shots of espresso. I can only hope they keep the coffee coming for now… at least until we get through this pandemic.
I’m on the same page as you, Mr. Tako – I don’t think the “vaccine rally” is going to last. It should be an interesting winter with the stock market and it’ll probably continue through most of next year.
It’s been impressive to see how quickly many businesses were able to adapt throughout the pandemic, but will it be enough to keep the economy from falling apart over the next year or so? I guess time will tell. In the meantime, stay the course is some great advice! 🙂
I think the market will continue to be volatile over the next little while as well. Some people have been staying on the sideline itching to get back to the game. The recent jumps probably got these people all excited and wanting to get back in the stock market. I suppose that kind of put oil on top of fire per say.
Value invest, time in the market, and keep executing your investment strategy. Ignore the noises.
I agree with you on most of your assessments. I also think that we will see high volatility in the months to come. Especially because we haven’t seen (at least over here in Europe) a big wave of bankruptcies yet. When this wave finally brakes it has the potential to draw the market down into a serious recession.
The one view I don’t share is that local retail will take a bad hit. Yes, there has been a tendency even before the pandemic started and it accelerated during. But in my point of view the majority of people will start shopping at Malls again as soon as the restrictions are being lifted. I see a couple of reasons why. 1. For a number of people this is a social event. Online shopping nowadays can never replace that.
2. Some products can be easily shopped for online and there I think we will see more and more local retailers struggling. I think about consumer electronics, kitchen appliances and the like. These are basically commodities nowadays and it doesn’t matter where you buy them.
Clothing is a counter example. Even though sizes should be standardized we all know there are big margins within the same size. Also shoes and groceries are different. While some people will shop for these things online I don’t see a major shift ahead in these areas.
So I think we will see a somewhat mixed outcome when it comes to local retailers. As has been the case in the past already I think we will see ongoing market consolidation where small business go out of business and the mid-sized ones are being acquired by bigger companies.
In the months ahead I see more opportunities arising to buy good companies for less and therefore I hold my horses for now. As you said: stay the course and stick with your investment strategy. Now more than ever.
Yup, there’s bound to be some more corrections as the virus continues to take it’s toll on the world this winter. But I’m optimistic that once people are able to get out and do things again, they’ll be willing to spend lots of money and another sustained bull market is around the corner. I’m with you on most of your points, except, I don’t believe the work from home thing will last. They tried this once before a few years back in the Bay Area…it was too unproductive for many companies and people in general like getting out of the house to work.
I think the stock market is increasingly becoming a piss poor proxy for the health of the economy in whole. The two have become un-correlated. The market can soar while regular people (especially those without a material portfolio) suffer tremendously. But it is worse than that. The best companies are no longer publicly traded. There is a smaller (better) market that is off limits to the average FI seeking Joe. I can’t complain. Life is good a little over 8 years post retirement. But I worry about the prospects for my niece and nephew who finish High School soon. Especially the boy who is not good with money.
Thanks for the reminder to stay the course and not react on emotion in our investments.
I don’t know which direction things are going to go or how divorced the market will remain from the economy, at least in so far as jobs and several sectors of industry.
There have certainly been some winners, and once we do come out of this, I think we’ll look back and see an economy that changed quickly—with many slow changes accelerating due to the pandemic.
Hopefully, that’ll be the silver lining, because otherwise, there’s nothing we can look back on but the tradgedy of lives lost and families destroyed.