Guest News Brief by Kip Hansen — 6 August 2020
Stock markets took an initial heavy hit back in March when the governments of the world issued edicts shutting down the economies of entire nations. Investors were scared silly. On March 9, 2020, this headline appeared in The New York Times Business section:
Wall Street Plunges in Worst Drop Since 2008
Oil prices crashed and bond yields tumbled. The S&P 500 had its worst day in more than a decade.
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The United States has weathered almost six months of Covid [madness] since then. How have investors fared?
Here I speak of investors as specifically opposed to stock market gamblers and speculators. Investors buy shares – partial ownership — in existing companies in order to take advantage of their future prosperity. By being partial owners, they normally receive a share of the company’s profits as dividends and as the company expands and grows, their personal share of the company grows in value. The value of a company is subjective and depends on myriad factors often turning on the concept of public confidence not only the specific company but in its industry and in the economy in general.
Market gamblers and speculators do something quite different. They buy shares in companies in hopes of making a profit on the small, short-term fluctuations in the daily prices of those stocks. The old adage: Buy Low, Sell High – but do it quick. In modern stock markets, there are all kinds of speculative moves that produce profits for these people, but the most salient fact is that they are gambling that a stock or the markets will move in the direction of their bet. When they have guessed right, they profit. If they guess wrong, they lose. These gamblers are often called Day Traders and, as knowledgeable and savvy as many are, like professional poker players, it is a mistake to consider them as anything else.
It is pertinent to point out the “The Stock Markets” are not “The Economy” – while they are generally related and inter-connected, it is a mistake to conflate the two. The U.S. economy, by many measures, in in rough shape, with government-mandated unemployment running very high and many of our smallest businesses having been forced to be closed by government orders related to Covid.
However, the aging U.S. population – its retirees – depend on pension funds and private investments as their main sources of income, along with whatever Social Security income for which they have qualified. Pension funds depend heavily on investments in the stock markets. So, our retired citizens, such as myself, are somewhat at the mercy of the markets.
How have the markets fared for investors?
Have investors been driven to penury by the reaction of the markets to Covid? by the downturn in the economy brought about by government Covid-mandates?
Investors are doing very well, thank you for asking.
Let’s look at the numbers:
Note: All of these charts are for the last 5 years, with the monthly values – the last value is close of market 5 August 2020. Remember: Investors are not bothered by the tiny (or big) day-to-day jitters – they have invested for the mid- and long-term.
The Dow Jones Industrial Average
The Dow is not at an all-time high – but very near. Despite Covid [Madness] investors are up even on a one-year basis – the Dow is higher than this time last year. Over a five-year period, from August 2015, the market as a whole is up from 16,500 to 27,200 – up 65%. That is a net gain of 13% per year which is a very good return on investment.
The S&P 500 is at an all-time high. In August 2015, it was 1,972, today it finished at 3,327. Over this last five years it has gained 69%, about 13.8% per year, a bit better than the Dow Jones.
The NASDAQ is the big winner. It has risen from 4,776 to 10,998 — a whopping 130% over five years. That’s a gain of 26% per year.
The idea that the Worldwide Covid Lockdown has crashed U.S. stock markets is simply not true. There has been no stockmarket crash in response to the pandemic which has barely affected U.S. stock markets, after the initial shock. Quite to the contrary, two out of three are at all-time highs, and all three major U.S. stock markets have been supplying terrific return-on-investment on price-value alone (even without considering dividends). Your well-diversified pension fund and your well-diversified personal portfolio is safe, healthy and doing well at the moment.
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Author’s Comment:
It never hurts to have a little good news. Good financial news is particularly nice when so many depend on their savings and investments.
Reader’s who wish to insist that things are worse-than-we-thought are free to do so, and I won’t argue. The crimes that have been committed against small and family-owned businesses by our political leaders who have been consummed by Covid-Madness are simply beyond anything I would have ever imagined, even as a young 1960s university antiwar revolutionary. I would have been less shocked to see concentration camps for radical dissidents.
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Hansen
I do not understand the purpose of this article unless you want to brag about your investments.
There was a stock market crash we now know was a very steep correction in the ongoing 2009 bull market.
Stock valuations are now extremely high even without the poor 2Q 2020 earnings.
With 2Q earnings I expect valuations to be the highest in stock market history.
Based on history, stocks bought today should be expected to have little or no return over the next decade.
Stock investors feel like investment gurus near market tops and like to brag about their returns.
Personal confidence in ones investment skills peaks at or near bull market peaks.
I am suggesting those who want to buy low and sell high should realize today is HIGH.
I have moved to 100 percent cash due to the extreme valuations.
While the one short term timing indicator I follow has been bullish since March 18, long term valuation indicators are bearish now, just as they were in February 2020.
But now we have 20 percent of the workforce getting unemployment compensation and many Democrats seem to want that to continue until election day.
Investors should thank the Fed for 24 percent M2 money supply growth in the past 12 months but that will not be permanent.
Biden is hiden’ and his mind is sliden’, yet he is
still doing well in the polls = the country is crazy this year.
My finance blog, since 2008
http://www.EL2017.Blogspot.com
I would trust the polls anymore than a Facebook stock valuation at this point. No one is telling the truth to strangers.
not trust.
Richard ==> You can thank Charles the Moderator for allowing your personal advertisement to appear here.
As Larry The Cable Guy says: “I don’t care what anyone says, that there is funny.”
+1
Thank you Charles the Moderat for allowing me to have a long post here that concluded with my free finance blog address, for furthet reading, where there are no ads and no money for me.
Thank you Hansen for completely ignoring every point made in my comment. My only qualifications are a finance MBA and 43 years of editing a financial newsletter called
ECONOMIC LOGIC.
Congratulations on your investing success.
Does this qualify as an example of “Those who can’t, teach”?
I took a few thousand and put it into a trading account. I had never purchased an option in my life. In this account I purchased only options. I’m up over 100% in less than 6 months. I’ve moved more than the original sum back into my checking account. I researched options before I started my strategy, but not a lot. I considered paying for an online course, but did not.
So have I been lucky? Shooting fish in a barrel? Or is my strategy sound? I do take gains when they meet targets and try and to not get greedy.
It just can’t be this easy. I think timing has been the key. We’ll see how well I fare in a long term downturn when that occurs.
Jim ==> See the graphs — if you started the second week of March, you have ridden the roller coaster up the high hill. What happens next we don’t know.
You are not investing, of course, but have had good luck with the gambling. I hope it keeps working for you.
Yep. You are correct.
Excellent comment, Kip. I searched for “options” since you did not mention them in your discussion of gamblers and speculators. Options are legitimate, as they provide insurance for those who hold investments, but they are pure speculative moves.
Jim – be careful. A friend of mine spent months studying options. last year he made over a $million – bring his portfolio to a value of $1.5 million. He’s a good guy, and gave two of his friends 30k a piece to cover medical bills.
Then COVID hit. Wasn’t watching quite close enough, didn’t understand completely how stop orders worked, and by early March, he had only $2k in the bank. It will take him a wile to recover. Be very careful. You can lose a lot buying stocks, but if you have some diversity, you can usually weather even a COVID downturn.
You are on the right track. I invest in long term call options. They are called LEAPS – options with a year or more time expiration on them – I like to go out as far as possible and buy in the money options. You can buy a stock at a fraction of the cost of owning it, and you have all that time frame for it to move in your favor. To me a wonderful investment strategy.
The correction is equal and opposite to the deception that preceded it.
In other words, sort of like one of Newton’s laws, except economic. In the final analysis, all this must balance at some point, and is not looking good long term. Generally throughout history, these types of black swan events lead to some type of war which can take on a whole new direction with unintended consequences. Sort of scary times.
This phrase I read somewhere makes a lot of sense, especially with what has been happening the last 5-6 months, but also the last 11-12 years since the Great Recession of 2008, if not since 1971 when Nixon abandoned the gold standard. The Nixon shock was a series of economic measures undertaken in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the USA dollar to gold at $35 an ounce. This was in part, a hangover from the debt incurred for the Second World War, which followed from WW1 and long before that.
The only thing that could save things now, is to have massive growth in the economy with new economic activity such as massive nuclear energy development and infrastructure development and repair, and getting back to full employment with a healthy made at home robust economy. And pick our trade partners carefully, and reject countries like China that are a pariah fascist state who rip us off and cause all kinds of global troubles just as we have seen since the New Year, 2020. Only the Republicans and President Trump can pull all this off, so this is one of the most important elections in modern times. The stock market thinks so, but if the Democrats sweep the country, then expect a major downturn for a very long time.
My portfolio gained about 14% gross over the lockdown period.
The people who are in trouble are small businesses. They don’t show on the stock market rankings, and those selling in high street shops to consumers with more money than sense (or taste) .
The onward march towards turning highs street malls into residential and café cultures continues, with real commerce moving to warehouses online and parked in industrial parks.
The raison d’être for the market town was to provide access to what the internet now provides access to – a wide range of goods and services in a single place.
Only food is still preferable to obtain in a supermarket, or specialised shop.
COVID 19 has simply accelerated a trend.
As far as production of real goods and services go, it hasn’t really affected that. People still need houses and plumbers and electricity. It has just taken the froth out of consumerism. People have realised they don’t need to commute, got to a gym for exercise, to always eat out in restaurants, to take planes to far flung parts of the world so they can share the company of the people they thought they were leaving behind…in short if it marks anything it may just mark the end of consumerism as a way of making ‘work’ and redistributing wealth.
Well about time too. Consumerism was wasteful, polluting, and, after the initial thrill of Spending Money, wore off, utterly soul destroying. It created unnecessary jobs purely for the social objectives of lowering unemployment and making people feel that they were contributing to society. It made everybody feel useless and unfulfilled unless they were spending money.
Frankly they might just as well have been given money to spend for no reason at all. It would have saved a lot of unnecessary activity.
Lockdown has and will continue to highlight some very salient issues: Just how little most people actually contribute to society, and who are the ones we can’t do without.
They are not politicians, or celebrities, they are not solely health workers either. They are the people who keep the power stations running, the internet going, who drive the delivery trucks, and who keep electricity on the wires and gas in the pipes and deal with the sewage and detritus of humanity. They are the supermarket staff who stack the shelves, and the barber who cuts your hair. And the personnel who man the warehouses that ship your online goods.
And lockdown has also highlighted another couple of issues – firstly how little we need to do to at least survive without many of the toys and trappings of civilisation, and secondly how bereft we are when shorn of the business that used to fill our lives, and how narrow selfish isolated and depressed many people are when they only have their own company and that of their families…
The world has changed, not smoothly, but with a point of discontinuity. I consider that trends which were extant before, have accelerated . Those with money invested in the need-to-haves will prosper: those with money invested in the nice-to-haves will not.
For me one salient question is how far the West will realise that its flirtation with renewable energy is not only not a need-to-have, but not even nice-to-have.
And I suspect that a LOT of media companies will go down, as they rely on people (a) actually consuming their product and (b) actually consuming the products of those that sponsor them.
Glory to be, people have perhaps for the first time in history, and certainly since WWII, had time to think. Only to discover that they were never taught how to do it…
Nope. The times they are a changin’, rather faster than usual, and this will be a catalyst for a lot more change beyond ‘harm to the economy’ .
I’ve always been fascinated by the need of someone people, to tell other people, that spending money is bad for them.
Optimism may be a bit premature.
Look up iukd, or iukp. You will see that investors in dividend paying, value shares have in fact lost heavily, and the recovery, if you look at the charts, seems rather shaky.
The US averages have recovered. But they are dominated by a few large capital tech outfits. And the PE ratios remain very high, historically.
I do not know what will happen. But I would not take the movements in either the Nasdaq or the S&P as evidence of safety. If I held an index fund in either one, I’d be getting out.
The wild card is of course inflation, perhaps co-existing with recession. I don’t know if that will be a real thing. I guess its possible that tech could be an insurance against it, though I am not seeing quite why that should be.
Anyway, walking on eggshells at the moment. Yes, the first wave passed, and yes, we are still here. But what is coming next is another matter.
Michel ==> I am not making any investment advice of any sort here. The purpose of this essay is to counter the doom and gloom portrayed in the Media (for political reasons).
Very few of the general public see the longer term stock indices graphs, they only hear the nightly news say “the Dow was up x percent today” of the S&P lost 2 percent”.
My purpose was to show the data in an easily understood form monthly values for five years the kind of time period of concern to investors.
michel: “<em<If I held an index fund in either one, I’d be getting out.
The wild card is of course inflation, . . .”
Prompts me to ask where you would put the money from the “getting out” part?
Kip
Unusual article for this forum.
With some interesting comments.
I’ll add to everyone’s data on the financial markets.
Financial history, while very exciting at time but when looked at over a long time it is unusually methodical.
Particularly when it comes to financial manias.
One of the features of a great financial bubble has been that the economy turns down with the stock market.
In “normal” rather than “bubble” conditions the stock market leads at tops by 10 to 12 months.
In 1929 the market peaked in September and according to the NBER the recession started in that fateful August.
Typically, post-bubble contractions last for around twenty years.
The previous great bubble completed in NY in September 1873.
And according to the NBER the fateful recession started in that October.
Another great bubble may have completed with the January peak.
The NBER determined that the economy peaked in February, marking the start of the recession.
Made very dramatic by the socialists shutting down the global economy.
As to the action in gold, it has been practical to use its price deflated by the CPI in the senior currency. Now the dollar, formerly the British pound.
On all five of the great bubbles back to the first in 1720, gold’s real price declined during the financial mania and gold stocks under performed.
Which happened to 2018.
And one of the features of post-bubble contractions has been gold’s real price rising, which has been the case since 2018.
With gold stocks outperforming. Take a look at a gold stock index divided by the S&P.
GDXJ/S&P.
It has been outstanding.
And if the past continues to guide will continue to outperform.
The action in precious metals are extremely overbought now.
Bob ==> On gold == gold bought at the 2011 high left one dragging low for seven years or so. Serendipitously, I bought a lot of 18K gold jewlery in 1975-1976 shopping at Florida flea markets, paying only 50% of spot gold price at the time. After having a lot re-made into custom jewelry for my wife, I had “leftover” 18K melted and cast into a mini-ingot that my wife wears on a chain — now worth over $500. It was meant to be her “get away” stash.
From the article: “Market gamblers and speculators do something quite different. They buy shares in companies in hopes of making a profit on the small, short-term fluctuations in the daily prices of those stocks. The old adage: Buy Low, Sell High – but do it quick. In modern stock markets, there are all kinds of speculative moves that produce profits for these people, but the most salient fact is that they are gambling that a stock or the markets will move in the direction of their bet. When they have guessed right, they profit. If they guess wrong, they lose. These gamblers are often called Day Traders and, as knowledgeable and savvy as many are, like professional poker players, it is a mistake to consider them as anything else.”
Poor Daytraders! Can’t get no respect! 🙂
I consider daytraders to be smart. Daytrading protects their money, if they have a good daytrading plan and execute it. Daytrading keeps one out of the market when things are most dangerous to an investor, like when they are sleeping and not watching the market.
Overnight sell offs have ruined many an investor. They won’t ruin a daytrader because the daytrader won’t have any money in the market during the overnight sell off.
Daytrading isn’t difficult if you have a plan and discipline, and $25,000. Yes, that’s right, a person has to have a minimum of 25,000 to put into a trading account before they can daytrade.
Why this federal rule was ever implemented is a mystery to me. Why would the U.S. government want to penalize people who don’t have $25,000 laying around? But they do. Some poor guy out there might be a natural daytrader with the potential to make millions of dollars all by himself but he’ll never get a chance to see because he doesn’t have $25,000 to start with. I see no benefit to this law.
And then we have the daytraders on steriods: The computer program traders that exaserbate the movement of the stock market both up and down moving the stock market hundreds of points in a day. Figure about half of the stock market’s gain or loss in today’s market is coming from program trading, trying to guess which way investors are going and get ahead of it, up or down.
I think program trading should be outlawed because it distorts the markets.
And individual daytrading should be made availible to anyone that wants to get involved. The government has no business saying who and who cannot daytrade.
Tom ==> Ah, if wishes were fishes … the same personality types Day Trade and/or play Poker Online. I’ve know professional at both – personal friends – each have had periods when they win and when they lose.
To be at all successful, both professions require knowledge, skill, and luck. The smart gamblers in both fields have a system and a plan, and stick to it – not ruled by emotion.
The most successful poker gambler I ever met finally admitted, after weeks of counseling, that his success was due to the fact that he “cheated” — was part of a “poker cheating team” that worked the Las Vegas casinos for years. The cheat was getting three or more players of the team (out of ten team members all of whom were recognized as regulars in the casinos) at the same table with a targeted fat wallet high roller. Using a series of signals they would communicate the relative strengths of their hands and force pots high when one of them had a particularly good hand. Once they had cleaned out the victim, they would leave the table one at a time over the next couple of hours and meet up in a distant desert diner for breakfast, where they would split up the profits for the night. With ten regulars on the Team, it never looked suspicious when a random combination of three of them would be at the same table. He made an annual “salary” of over 200,000 a year.
“To be at all successful, both professions require knowledge, skill, and luck. The smart gamblers in both fields have a system and a plan, and stick to it – not ruled by emotion.”
That’s the secret! And it is much easier said, than done.
Here’s a scenario: You buy a stock and decide how much you are prepared to lose and keep that price in mind (if you are an experienced daytrader) or set a sell limit stop (if you are not) and if your stock price starts declining and reaches the sell point, then you sell, and within five minutes the trend has reversed itself, goes above the point where you sold, and continues to climb the rest of the day, and you ended up losing money on a trade that would have made you money if you had not sold at that point.
So, what do you do the next time you get in that situation (probably the next day)? You better sell at your sell point! That’s the discipline. If you hang on hoping the price will reverse, like it did before, you may lose your shirt, if it doesn’t, so instead of losing a little bit of money follwing your strategy, you end up losing a lot of money.
You have to have a daytrading plan. You have to execute the plan. Or you should go find something else to do because you are not suited to daytrading.
As for your cheating gamblers story, I don’t see how it applies to a daytrader.
Stock movements are predictable to a certain extent. One can make money by understanding the patterns.
I used to just follow one stock and daytrade it continuously. Then I stopped doing it a few years ago and just let the stock sit all through the Wuhan downturn and now it’s up about 300 percent from where I bought it. It’s a housing stock. I guess lots of people are leaving New York City and other Democrat-run cities and are looking for houses to buy in less crazy parts of the nation. I’ll hang on to this stock. 🙂
I prefer swing trading now.
You are neglecting the inflation that goes with all the bailouts. These rises are a preview. Yay, my money has doubled — but the dollar buys only half as much. How rich am I?
Willy ==> We have yet to see inflationary pressure here in the US. One never knows, but so far so good.
For most of us retirees, our incomes are looking good and our capital is preserved which is the point of this essay.
Epilogue:
Thanks to all the readers who have joined in the discussion – even the couple of hecklers.
I hope that the good news about the major stock markets has helped dispel some of the gloom.
Thanks for reading!
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A little mathematical nitpick. You can’t just divide the 5-year percentage return by 5 to get the annual return. You must take into account the compound growth of the portfolio each year.
On this basis your figures of 13%, 13.8% and 26% should actually be 10.5%, 11% and 18%.
But still a healthy return for those with patience and nerves.
Richard ==> I suspect you are right … just quick back of envelope figures here.
Yes, and you have the point right ….. these are very healthy returns even before the dividends (if any) are taken into account.