Investors should be twice as careful in the stock market due to current circumstances. The first danger is the overvalued stocks that have risen excessively over the past year
We will remember 2020 as the year that revolutionized the whole world. When the world saw the first wave of the pandemic in March 2020, stock markets collapsed. Compared to the beginning of 2020, the S&P 500 index has lost 30% of its price, while the price of the WTI has fallen below zero. The Dow Jones index fell 10%, the biggest collapse since Black Monday in 1987. The discussion between Russia and Saudi Arabia over the oil issue took place during the pandemic resulting in a drop in share prices. Together, these factors have caused the most severe economic tensions in history.
To support the economies of developing countries, the decision was made to artificially increase market liquidity through Quantitative Easing, which means they started printing money at the same rate as the coronavirus was spreading. The total amount of banknotes issued in 2020 amounts to 9 trillion dollars, which represents 25% of the entire US dollar supply. In addition to compensating for the losses of funds, large corporations and health care expenses, this money was given directly to US citizens. As a result, the markets began to recover gradually.
In 2021, we will have to resume the decline seen in 2020. Last year it changed investors’ approach to money and forced them to review their investment strategies. The movements in assets over the past 5 months have caused traders to think twice about where to invest their capital and for how long. Now, with the pandemic underway, we need to evaluate forecasts and actual market trends. So where should we invest during the coronavirus crisis?
What is happening in the stock market?
Investors should be twice as careful in the stock market due to current circumstances. The first danger is overvalued stocks that have risen excessively over the past year. The US stock market “boasts” the biggest bubbles: Remember the stock of Zoom or Tesla skyrocketing during the pandemic? Elon Musk even openly admitted on Twitter that his company’s shares cost no more than $ 700, and as a result, some investors felt insulted and sued him.
Today, the shares of Zoom and Tesla are already correcting but there are more bubbles. For example, in early 2021, the shares of companies specializing in solar energy began to experience substantial growth. In early January, SunPower’s stock was up 20% and by the end of the month, it jumped from $ 24 to $ 54. The shares traded hitting a high in March, only to undergo a sharp correction. On March 30, 2021 they cost 29 USD. Such impressive growth and an equally important decline are signs of an overvalued asset.
The lessons of WallStreetBets
The second peculiarity of the modern stock market is that it provides private investors with easier access to trading in securities. This easy access was provided by platforms such as Robinhood, which became famous with the history of WallStreetBets. In January 2021, members of this group on the Reddit platform began mass buying the shares of a nearly bankrupt game store company, GameStop, hurting large hedge funds (such as Citron Research which was counting on GameStop bankruptcy and held short positions on this stock). This massive purchase raised the company’s stock from $ 19 to $ 500.
Some will say: so what? A group of enthusiasts decided to save a dying company from complete bankruptcy, and in early February this Reddit group also applied its strategy to silver which recorded a 12% increase to reach $ 30. No hedge fund is safe from onslaught by private investors “on Reddit”, and who knows which stocks they will consider undervalued next time? The events provoked by the WSB group showed that market manipulations are now possible not only for big players but also for common investors. This should make you twice as cautious about trading on the stock exchange, especially if you are participating in such pump-and-dumps. In the short term, this could bring a good profit, but as a trading strategy, it is not reliable: the risk of being “screwed” is very high.
How to invest in 2021?
We still don’t know when this pandemic will end. The situation is now similar to that of cryptocurrencies in 2017, when the price of some assets grew by 1000% in a week and then fell just as quickly. 46th President Joe Biden is already printing $ 1.9 trillion more to put into the economy.
The main task of any investor in the market is to find stocks that have real reasons for growth, not just artificial stimuli. Experts say the pinnacle of the crisis has yet to come and, most likely, we will see a very important collapse, more difficult to overcome than last year.
You should definitely invest in assets that didn’t go down much during the pandemic and have some safety margin in times of trouble. First of all, it’s about food retailing – people will always need food and have a habit of storing it (we all know the history of toilet paper). Those who follow the Buy & Hold strategy can aim for the pharmaceutical sector: companies in this branch aim to make money by exploiting this pandemic and are closely studying new strains.
IT companies, on the other hand, can protect you from losses: during the pandemic, they not only avoided collapses, but also made money. Their actions are expensive but it is obvious that the future will be digital and “from home”, which means that new technologies will be developed. Stocks of IT companies will continue to grow, so you need to know how to find promising startups.
summing up
We are living in difficult but interesting times. The events of 2020 have significantly changed the whole of society, including of course the economy. In April 2021, a year after the start of the pandemic, the world is still unable to ease lockdowns, measures against the coronavirus and lessen fear of the pandemic.
Investors should be extremely cautious about everything that happens around them. The first thing to decide is your risk tolerance. Based on this, you need to choose your strategy and create your portfolio. Be cautious, don’t be tempted by overrated actions and correctly interpret data and events. By studying them, you will come to correct conclusions that will help you invest with less risk and more profits. Always remember that you are the person in charge of your investments even when you allow someone else to manage them.