After the market crash that we experienced in March, markets did recover in the weeks/months after but the upticks of the last weeks do remind me of greedy investors. Investors that do not want to miss the train. People are getting greedy and that is normally a sign of a (local) high in the markets. The index and some stocks are heavily overbought. The S&P is only trading around 5% from the all time high and that just in the middle or at the end of the Corona outbreak crisis. The S&P is close to break even for the year. It does not make much sense.
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Investors and analysts were at the beginning of the year thinking that the S&P was expensive and that it was time for a healthy correction. The Corona crisis was not a healthy correction but a crash. The outbreak seems under control but that does not mean at all that there is little damage done. Quite some companies have lost reasonable amounts of their revenues and supply chains are often messed up with part of the chains being damaged. There is no vaccine or effective treatment yet and because of that the economy can not run for the full 100% in the upcoming months. The general opinion is that there will be a rapid recovery but most forget to price in the risks that the economy is facing.
No bankruptcies yet
So far there have not been that many bankruptcies, which makes sense. Most companies, in the low interest rate environment, can survive a couple of months with lower revenues and low interest rate expenses. Though, slowly they are burning cash. Weak companies or companies with low margins will start to feel the massive pain after 6-9 months of lower revenues. Then they will get into liquidity problems. When the first major company will start getting into these problems there will be a chain reaction that will send the stock market lower again.
Markets getting mispriced
Make no mistake, I am not saying this is going to happen. But the risk of this has to be priced in in the markets. It might well have a 30% chance of happening. A 30% chance of a downtick of maybe 30% in the Index. That would mean pricing in a 9% lower index level for that scenario. In the most likely case we do see the economy recovering and we do not see major financial problems for most companies. Still, without the crisis, the economy and the job market would have been much stronger. The economy is an ill patient that slowly recovers but cannot run a marathon yet anywhere soon. In my honest opinion, investors are missing this point. Lots of (small) investors do not want to miss out on the rally and see no alternative to make money. Which is the same as the situation during the Bitcoin mania.
Greed is back
Greed is back. Greed is Good. For the ones that go against it. As Warren Buffett always says: “ Be fearful when others are greedy and greedy when others are fearful”
Why did we tick up so much on Friday?
On Friday the US came with their monthly job report which was much better than expected. It put more energy in the upticks and people seem very convinced that the economy will quickly recover.
Massive returns on outperformers
Some companies/sectors did outperform over the last weeks. Those were mainly financials, energy companies, insurers and (commercial) real estate companies. There were some really nice opportunities in the last weeks. Beaten down sticks that barely did recover. This paid off very nicely in the last week. Some stocks increased as much as between 50% and 100%. Currently there are still some hidden gems like this and for the ones that want to read about them: click below and go for a free trial if you have some money to invest.