We will remember 2020 as the year that turned the whole world upside down. When in March that year the globe got immersed in the first wave of the pandemic, stock markets collapsed. Compared to the beginning of 2020, the S&P 500 index lost 30% of its price, while the WTI price dropped to negative values. The Dow Jones index dropped by 10%, which was the deepest slump since Black Monday in 1987.
The argument of Russia and Saudi Arabia over the oil issue coincided with the spreading of the coronavirus and the subsequent decline of stock prices. Together these factors resulted in the most serious economic stresses in history.
To support the economies of developing countries, a decision was made to increase market liquidity artificially by Quantitative Easing, which means the printing machine started printing money at the same pace that the coronavirus was spreading. The total sum of banknotes issued in 2020 amounts to 9 trillion USD, which makes 25% of the whole money supply of the USD. Apart from compensating losses of trusts, large companies, and expenses on healthcare, this money was given directly to US citizens. As a result, markets started recovering gradually.
In 2021, we will have to shoot the troubles of 2020. Last year change the approach of investors to money and made them revise their investment tactics. Steep asset moves of the last 5 months made market players think twice about where to put their capital and for how long. Now, with the pandemic going on, we have to check the perspectives and actual market trends. So, where should we put money in with the coronavirus crisis still raging?
What is going on in the stock market?
Investors should be twice as careful in the stock market in current circumstances. The first danger is overvalued stocks that grew excessively last year. The US stock market “boasts” the largest bubbles – you remember the shares of, say, Zoom or Tesla sky-rocketing by thousands of percent during the pandemic.
Elon Musk even openly admitted on Twitter that the shares of his company cost no more than 700 USD, after which some investors felt insulted and sued the businessman.
Today, Zoom and Tesla shares are already correcting but there are more bubbles. For example, at the beginning of 2021, the shares of companies specializing in solar energy started noticeable growth. At the very beginning of January, the shares of SunPower rose by 20%; by the end of the month, they grew from 24 to 54 USD. The shares traded that high until March, then corrected steeply. On March 30^th^, 2021, they cost 29 USD. Such an impressive growth and equally impressive decline are reliable signs of an overvalued asset.
The lessons of a hamster rebellion by WallStreetBets
The second peculiarity of the modern stock market is simpler access to start trading securities for private investors. This was provided by such platforms as Robinhood that has already became known from the story with WallStreetBets.
In January 2021, the members of this union on the Reddit platform started massively buying the shares of an almost-bankrupt network of gaming shops GameStop, harming large hedge funds (such as Citron Research that counted on the bankruptcy of GameStop and played short on its shares). As a result, the whole plot made the shares of the company grow from 19 to 500 USD each.
Some will say: so what? A group of enthusiasts decided to save a dying shop from complete devastation… It would be true if at the beginning of February Reddit hamsters had not applied their tactics to silver which resulted in an ounce of the metal growing by 12% and reaching 30 USD.
No hedge fund is safe from intervention of private investors “from Reddit”, and who knows which stocks they will consider undervalued next time? The events provoked by the WSB hamsters showed that market manipulations are now available to not only large players but to ordinary investors as well. This should make you twice as cautious about stock market trading, especially if you are participating in such “pump-and-dump” things.
In the short run, this might bring a good profit, but as a holistic trading strategy, this is useless: the risk to be left with a “dummy” bought at a cosmic price is too high.
How to invest in 2021
We do not know yet when the coronavirus chaos will end. Things are now similar to the crypto situation in 2017, where people got crazy about certain assets that grew by 1000% during a week and then declined equally fast. There are few doubts that the show will go on – the 46th President Joe Biden is already printing 1.9 trillion USD more to pour in the economy.
The main task for every investor in the market is to find shares that have real reasons for growth, not just artificial stimuli. Experts say that the peak of the crisis is yet to follow, and most likely, we will witness a really dramatic slump, not as quick and easy to get out of as that of last year.
You should definitely invest in stocks that did not drop much during the pandemic and have some margin of safety to overcome the trouble to follow. First and foremost, this is food retail: people will always need food and are in the habit of storing it (we all know the story with toilet paper).
Those who follow the Buy&Hold strategy can turn to the pharma sphere: companies of this branch always aim at making money on the complicated situation with the virus and are looking closely for new types of it to appear.
IT companies, in their turn, can secure you from losses: during the pandemic, they not only avoided slumps but ruled. Their stocks are pricey but it is obvious that the future will be digital and “from home”, which means the development of electronic technologies. The shares of IT companies will go on growing; here, it is necessary to know how to find promising startups.
We are living in hard but interesting times. The events of 2020 significantly changed the whole society including the economy, of course. In April 2021, a year after the pandemic started, the world still fails to abolish lockdowns, frequently absurd “anticoronavirus” measures, and overall panic.
Investors should be super cautious about everything that is going on around them. The first thing to decide upon is your tolerance to risks. Based on this, you will choose your strategy and form your portfolio.
Be prudent, do not get tempted by inflated shares, and interpret events correctly. Projecting them on the stock market, you will arrive at correct conclusions that will help you invest with minimal risks and maximal efficacy. Always remember that you are the person responsible for your investments even when you let someone else manage them.
Interesting related article: “What is an Investment?“