As the Coronavirus continues to plague the world it seems like it has been a very long 4 months from when we hit the depths of the bear market. On March 23rd we alerted our investors and readers that the Stock Market was reaching a bottom despite the panic many investors were experiencing. https://bullsnbears.com/2020/03/23/light-at-the-end-of-the-corona-virus-tunnel/
Fast forward to today and the SP500 has managed to recoup the majority of its losses while tech darlings such as Apple, Amazon and Microsoft have been making steady new all-time highs. This article will seek to explain why we believe there are two very compelling reasons why this has occurred and how we can take advantage of this phenomena going forward.
The consensus among investors, especially those who panicked and sold, is that we are in the midst of a stock market bubble. Many are perplexed to see stocks such as Apple trading at new all-time highs while Covid19 rages its ugly head around the world destroying economic activity. Sometimes, actually often, the consensus is wrong and there is a good reason for strength in certain pockets of the market.
The first and perhaps most obvious reason is the mountain of stimulus coming from the Federal Reserve and Government in the form of easy monetary policy and fiscal spending. Vast amounts of “money printing” combined with low rates increases the value of all assets. Investors are further enamored by growth and visibility of earnings making tech companies the envy of the market.
The second reason and the one which we believe is even more powerful and less obvious to the masses, is the exponential growth of technological innovation which leads to dramatic increases in productivity for individuals and corporations.
There will always be deviations from the mean in the form of shakeouts, pullbacks, corrections, crashes and bear markets. We view these events as opportunities so long as we are focused on the true innovators of our time. For example, in 2008 one had the chance to accumulate Apple at $100 and today it is equal to $2100 (post 7-1 split). In March Amazon was at $1600 and today $3000.
Our long-term view is that technological innovation is accelerating exponentially as computer chips become smaller and faster and software becomes smarter especially as artificial intelligence advances. These technological forces add deflationary pressures and will likely result in a low rate environment for a very long time. Coronavirus has accelerated the growth of transformational technology pushing forward advances we didn’t expect for several years.
With this in mind, we are not advocating simply buying and holding a basket of technology stocks. One must have a risk management strategy in order to avoid the devasting losses which bear markets will inevitably produce. We believe that caution is warranted at this juncture in time as we are entering a historically difficult period for the market which tends to occur between August and October. This year, especially as we approach the November elections, should be exceedingly volatile. We are closely watching our indicators for signs of a downturn. The bar for further outperformance has been raised given the amazing rally we have witnessed this year from the lows. Should the market correct, we are preparing our list of “leading” companies to add to our investors portfolios.
As usual, if you would like more detailed information about investing with us, feel free to contact us at firstname.lastname@example.org
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