COVID-19: Will the market behave the same this time round?- Part 3


It took me some time to start writing the third part of this series. I wrote Part 2 in February and it had been more than three months since Part 2 was published. You might be thinking what took me so long.


The reason is that COVID-19 turns out entirely different from what I was expecting back then.


In February, the assumption I have is that COVID-19 will probably affect the world like how SARS did in 2003. Back in February, COVID-19 (it was not even declared as pandemic back then) was largely contained within China. People were expecting that the rest of the world would be safe from it. Little did we know that it's pretty much the opposite now with China on track to its pre-pandemic activity levels and much of the rest of the world in some sorts of lockdown (though most are easing the restrictions in the coming weeks).


The economic impact of it is also far reaching. Who could forget about the stock market in March 2020? The circuit breakers came into effect multiple times. S&P drop 30% from its record highs in 22 trading days. And not only were equities affected. Pretty much everything except for USD got slaughtered back then. Oil prices reached negative territories for the first time. Commodities like gold and silver tumble together with the stock market in March, with gold to silver ratio hitting over 125 (a 5000 year record, yes 5000 years). Hell, even the Treasury bonds crashed together with the stock market.

This is simply pure madness.

And this is beyond anything I could have expected in February. COVID-19 throws the world into chaos.


Unprecedented times call for unprecedented measures. On 23 March (also the lowest point of the market), Federal Reserve announced unlimited Quantitative Easing which means that they would buy unlimited amount of government debt, corporate and municipal bonds. This greatly supports the market and 23 March low has not been visited since then.


In fact, S&P 500 has nearly a 30% gain as compared to its 23 March low. It is now hovering above its SMA 20 value, with a technically bullish indicator of SMA 20 being above the SMA 50. Its current value is still below the SMA 200 value though and that shows that we are not completely out of the woods yet. If you are interested to know more about trend investing, please refer to my articles here and here.


While I have no doubt that the general market would eventually recover, there would be some individual sectors or businesses which would probably be different from now on.


A new world order may be made, and that could mean some sectors may look very different in this change of tide. Some might benefit from COVID-19. Some might experience strong headwinds in the near future, or possibly forever.

Here, I just like to highlight on a few of such sectors.

Technology Sector

The technology sector is doing rather well right now, with everyone increasingly relying on technology for their everyday life. Netflix has a huge jump in subscribers. Microsoft beats analyst expectations in the latest quarter results. Though advertising revenue did took a hit in March, both Facebook and Alphabet have their stocks rallying after they posted better than expected results. And all these are just tips of the iceberg. Year-to-date, NYSE FANG+ Index (which comprises of big tech names like Facebook, Apple, Amazon, Netflix, Google, Nvidia etc) is already up nearly 20% despite the COVID-19 situation. On the broader technological market, the NASDAQ is also up 3% year-to-date. In the same time period, DJIA and S&P 500 are down 14% and 9% instead respectively. That highlights the strong growth of the technology sector on a whole and it's hard to see us relying less on technology post COVID-19. I believe the die has been cast, and the whole COVID-19 situation has further accelerate the world into new technology trends like Internet of Things (IoT), Artificial Intelligence (AI) and cloud computing. The only caveat though is that technology stocks are usually highly priced due to shareholders expectations in their future earnings. While the future is certainly bright for the technology sector, it's important to have sensible and realistic expectations on the growth of the share price for most of these technology companies. If you are risk adverse and do not like to pick individual stocks, you could look at purchasing ETF (in this case, QQQ) for exposure to the sector instead.


Aviation Sector

If SARS was a rainstorm for the aviation industry, COVID-19 must be an avalanche. I think much has been discussed about this sector and I will not try to repeat what most other articles have already said. What I would like to highlight though is that there is a very good chance the aviation sector will face some fundamental changes and travelling would never be the same in the near future or forever. In one of the latest Havard Business Review articles, Ostrower (editor-in-chief ofThe Air Current) mentioned huge cost pressure on airlines, with many having to reconsider in-flight wifi. This could be very possible with the need to remove in-flight entertainment system in aircrafts due to hygiene issues. Interestingly, he also mentioned the possibility of Amazon (technology company again) being a potential winner out of this COVID-19 situation as many airlines will be looking to convert their wide-body aircraft to cargo planes and sell to companies like Amazon at cheap prices.


Airlines have never been the best businesses to own with their huge capital expenses and razor-thin margins. Many of the airlines required bailout from their government a couple of times in history (though government might not always be ready to bail them out. eg Thai airways). If you are wondering if it's a good time to be buying SIA shares now, I suggest you to read this article in DrWealth before deciding.


Safe distancing required, indeed.


REITs

With most of the world in a lockdown for the past few weeks/months, it's no surprise that REITs are not doing too well either. And recovery will probably be not as fast as we would like to, with the need to reduce unnecessary travelling to malls/office and practice safe distancing a very possible integral part of our life in the near future. Most of the REITs have suffered a tremendous drop in March, just like other equities. Being an income investor, REITs have always been in my radar to accelerate my retirement plan. Hence, it's important for income investors like me to understand if REITs could eventually survive this. And if they do, which one of them has a better chance of walking out of this unscathed?


I strongly encourage you to read this article from InvestmentMoats which did a deep dive into DBS report to determine which of the S-REITs have a better chance of surviving COVID-19. Do read before you purchase any S-REIT.

Closing thoughts

I recently ran a poll in the Facebook group and everyone believes that the current rally is a dead cat bounce. This is no surprise with the unemployment numbers in United States reaching an all-time high.


There's currently a huge disconnect between the Main Street and the Wall Street. However, this had happened before (during the early 1900s after The Panic of 1907) and what we are experiencing now might be a repeat of it. The stock market tends to be forward looking (three to six months ahead). With the Federal Reserve doing all they could to keep the US economy going and many other central banks pledged to support their economies through this crisis, there are already expectations that the worst is over and we are on the road to recovery. Unless we see a second wave of COVID-19 or another black swan in the next few months that defies such expectations, there is a good chance such a rally will continue.


Of course, whether the market goes south or north tomorrow is anyone's guess. What's important is to know how to handle your investments in different market conditions. I covered some parts of these knowledge here and here for your reading pleasure.


So, will the market behave the same this time round?


If the question is about whether the market will eventually recover from this crisis (like all the other crises), the answer is yes. But it might in a very different shape or form with the rises and falls of various sectors. Do remember that while the market always recovers, the same could not be said for all businesses.

A new world order awaits.


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