As we begin each year and hear all the stock market predictions, I like to look back at what people were saying at the start of the previous year. Barron’s magazine always surveys 10 well-known Wall Street fund managers for their forecasts, so revisiting those is usually part of my review process. As is often the case, their interviewees’ 2020 projections were way off.
Most of them predicted the 10-year bond would yield 1.89%. (It ended at 0.92%.) Many also said to overweight finances and energy, and underweight technology. (Yet, finance and energy stocks were some of the worst performers, and technology stocks were the best.)
Don’t let market predictions based on election results and a new president throw you off, either. Variables involved with stock-market returns go far beyond tax rates and deregulations. For example, historically, the market goes up despite tax-rate increases. And although analysts thought our last president’s deregulation promises would benefit financials and energy, those were the two worst-performing sectors during the past four years.
We don’t even have to go back as far as the 2016 election, though. Can you imagine if I’d told you, at the beginning of 2020, the GDP would drop 4% and the presidential election would be heavily contested? You would have wanted to sell everything; however, you would have missed the upswing in the markets this year.
All of this shows how difficult it is to predict the markets. It also reconfirms the importance of diversifying your investment portfolio and focusing on longer-term trends.
The vaccine and the market
As I said in my October newsletter, it isn’t about the election; it’s about the vaccine. In my eyes, that remains the most important factor in 2021.
The market was pricing in 60% of the population being vaccinated by June 2021. Now, it’s looking like it will be late September before we get to that point. We’re starting to see some increased market volatility because of this.
Although herd immunity is taking longer than expected, we’re still on track to open up the economy by the end of the year. This bodes well for our portfolio in the longer term because our funds favor companies that benefit from the re-opening, as opposed to “COIVD stocks” that are heavily weighted toward technology.
In the shorter term, we’ll see some extreme movements up and down, though, and it may take a bit longer to realize these benefits.
Steal from the rich and give to the poor
And have you ever heard of Robinhood? Not the one from English folklore. I mean the app created by two young Stanford graduates, who were inspired by the Occupy Wall Street movement. They’ve tried to turn stock investing into a casino-like experience. As The New York Times reported, “with one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game.” Unfortunately, the same article went on to describe one day-trader, who took out two loans against his house and lost almost everything.
Now, Robinhood has become the symbol for all the crazy things happening in the market during the COVID crisis.
Not sure what I mean? Several stocks, over the past year, have skyrocketed for no apparent reason.
For starters, Tesla had a 700% stock upswing in 2020, despite the fact that they’re only profitable through the sale of regulatory electric car credits. It’s a flashback to Cisco in the 1990s. Cisco is still a great company, of course, as evidenced by their revenue increasing from $19B in 2000 to $50B today. However, the company’s stock is still down 40%, from its peak in 2000, so it isn’t a good investment choice.
And then there’s GameStop. Although they sell video games via retail store fronts (a dying distribution channel), instead of digital downloads, the company’s share price has gone from $4 per share to more than $360 during the past year. Day traders on apps like Robinhood, AMC, FIZZ and others, drove this spike. Before that, the average price target for GameStop was $13.44!
What drove GameStop’s stock price to climb so sharply? (Regulators are certainly asking the same question, especially because Robinhood has a tight relationship with Citadel Securities – a large Wall Street hedge fund.) It appears a group of investors, on a Reddit messaging board, decided to bid up the stock so they could hurt New York hedge fund managers, who were placing bets the stock would go down. In short: a populist stock revolt to upend rich, Wall Street hedge funds. A few of them have racked up significant losses.
Such upswings are now easier for “the average Joe” to influence, due to transaction-free trading and the ability to buy a fractional-share of a stock (instead of ponying up the full-share price for companies like Amazon, trading over $3,000 per share).
When you combine this with: federal stimulus checks, apps like Robinhood that also enable trading derivatives and magnifying stock positions with personal loans, and a large hedge fund paying Robinhood to send them these trades, it’s a recipe for a stock-market bubble like the ones driven by “bucket shops” in the early 1900s and online trading in the 1990s.
In other words, I think these are harbingers that history will repeat itself, yet again.
It’s entertaining to watch, but this isn’t likely to end well so, please, keep your distance. Your only protection is to globally diversify your portfolio of stocks, via funds and ETFs, while also favoring the cheaper, more profitable firms.
In addition, this is a good lesson in passively investing in index funds that mechanically purchase these stocks as they rise. GameStop is now the 4th highest stock in the Russell 2000 small-cap index, but if you use the right stock managers (like we do), they’ll screen out such temptations and bypass overly-valued companies.
As always, please stay safe, remain diversified and get your vaccine when the opportunity arises.