Investing in lessons learned from the pandemic

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On September 21, 2021, Investopedia teamed up with another member of the Dotdash online publishing family, Very well, by organizing a unique virtual conference, “Your money, your health”. The investment-focused roundtables during this conference included “Investing during the pandemic: How the pandemic has changed investor behavior and impacted global markets” and “Healing the economic scars of the pandemic”. Among the topics discussed in these sessions were lessons learned from the pandemic, in addition to the future of fiscal policy.

The financial experts who were to attend these sessions included Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co. Inc., and Ethan harris, Global Economy Research Manager at Bank of America Merrill Lynch Global Research. Below, we offer key excerpts from their most recent research notes.

Key points to remember

  • A lot of new inexperienced investors trade stocks.
  • How they will react in the next bear market is a major concern.
  • Their ability to choose stocks wisely is challenged by Warren Buffett.
  • The Fed’s easy money policy burdened many savers and investors with negative real returns, creating a de facto tax on their wealth.

By Liz Ann Sonders

“The width of the S&P 500 remains newer than that of the NASDAQ or the Russell 2000, but it has also deteriorated. In general, market width indicators highlight the percentage of stocks in an index that are trading above moving averages; or the number of stocks up versus the number that are falling – often incorporating volume statistics. An analogy often used to explain why width matters comes from the battlefield. When the generals are on the front line, but the soldiers are lagging behind, the force is less powerful than when the soldiers are on the front line alongside the generals.

“The percentage of S&P 500 stocks trading above their 50-day moving averages peaked in April, bottomed in June, improved until recently, but are under pressure again. The same cannot be said of the NASDAQ and the Russell 2000, which both peaked in early February when they generally fell. Relative to their 200-day moving averages (DMAs), all three indices are generally trending. to decline since April. ”

By Ethan Harris

“Turning first to the United States, two developments have made us very cautious about the short-term outlook. First, the United States has actually hit a big slowdown on the supply side. records. The second development is the COVID surge. The economic impact of the delta wave is already visible in the data. Retail sales (excluding autos) fell 0.4% in July. In addition, a significant weakening of small business Homebase and the UKG summit frequency data points to the risks of a weak impression of the payroll in August. As a result, U.S. economy chief Michelle Meyer and her team reduced third-quarter GDP growth from 7.0 percent to 4.5 percent and overall 2021 growth to 5.9 percent from 6.2 percent. . heading into next year, the team continues to be much more bullish than consensus given very strong demand fundamentals and the prospect of further fiscal stimulus. “

“China is also entering a soft phase, but with a slightly different timing and causes… While the recent setbacks in the United States and China have disrupted the global recovery, it is important to note that we expect this. that the downturns in both countries are short-lived. – lived. In the United States, we believe that the gradual easing of supply constraints and an improvement in the COVID situation in the fall will allow strong growth of 6.0% in the fourth quarter. Economic activity is also expected to pick up in China with the easing of policy. a lot will depend on how COVID plays out: in particular, the size and timing of a possible winter wave will be crucial. ”

Warren Buffett on stock picking

At Berkshire Hathaway Inc.’s (BRK.A, BRK.B) 2021 annual shareholders meeting on May 1, Chairman and CEO Warren Buffett repeated his long-held suggestion that the average investor doesn’t not the ability to choose individual stocks well, and therefore, instead, should invest in an S&P 500 index fund. To illustrate the difficulty of picking long-term winners, he presented the lists of the 20 largest companies in the world by market capitalization in 1989 and today. None of the top 20 of 1989 is still in the top 20 today. In addition, the largest company by market capitalization today, Apple Inc. (AAPL) with more than $ 2,000 billion, is more than 20 times more valuable than the largest company in 1989.

“Be on board the ship,” he advised. “You can’t help but do well if you have a diverse pool of US stocks,” he added. In a blow against active trading, he commented that doing “30-40 trades per day” is not a wise way to invest.

Retail investment boost

Buffett’s comments come amid a surge in retail investment, with estimates indicating that more than 10 million new investors entered the market in the first half of 2021, roughly the same number seen in the course of the first half of 2021. of the previous year. This fueled explosive growth at brokerage firms such as Robinhood Markets Inc. (HOOD) and encouraged, among others, payment processor Square Inc. (SQ) to enter this booming industry. The digital payment platform PayPal Holdings Inc. (PYPL) has also caused a stir with its progress towards offering brokerage services.

It remains to be seen whether this represents a constructive democratization of investment, as proponents claim, or a destructive speculative frenzy, as critics warn. A related unknown is how all of these new investors will react to the next major market pullback.

In 2020, as the COVID-19 crisis erupted, a brief but sharp bear market kicked in that saw the S&P 500 index drop 35.4% from its intraday high of February 19, 2020 to its lowest level. intraday low on March 23, 2020. By August 2020, almost all of the lost ground had been regained. Yet this sharp drop has tested the courage of many experienced investors, not to mention that of newbies with no previous experience of similar downdrafts.

Fed policy weighs on savers with negative returns

Meanwhile, the Federal Reserve continues to keep interest rates at historically low levels in order to stimulate the economy and support asset prices. At the recent Jackson Hole Economic Policy Symposium, Fed Chairman Jerome Powell said the central bank “will continue to hold the [current] target range for the federal funds rate. “

While this easy money policy has supported the prices of stocks, bonds and real estate to the benefit of some investors, it has been detrimental to other savers and investors who depend on the interest and income streams of dividends. As of August 16, 2021, the FDIC reported that interest rates on bank deposits ranged, on average, from 0.03% per annum on checking accounts paying interest to 0.27% on certificates of deposit (CD ) at 60 months. Yields on US Treasury securities with similar maturities ranged from 0.07% to 0.69%.

Given that current measures of inflation hover between 3.6% and 4.2%, as Powell noted, and the Fed’s long-term goal is to keep it at around 2%, many savers therefore face prolonged negative real returns (ie for inflation) on their money. This, in turn, represents an effective tax on their wealth. How savers and investors can cope with this reality is another major issue for the future.


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