Why Aren't You Back in the Market?

The last week of February and the first three weeks of March were, inarguably, hideous for the stock market. Terrified investors selling equities for whatever they could get and running for the hills (okay, stuffing the money under the living room rug). Uncertainty. Worry. Job losses. School closures. Office closures. No eating out/sports/ parties/parks. Plaguebecame a term not from history or science fiction, but an everyday reality. Stocks plummeted, seeing drops of 30-35% almost across the board. 

And then, as though someone flicked a switch, on March 24 the market bounced. With a few hiccups, it’s been climbing since. The Standard & Poors 500 index is up about 22% today from its March low, recovering 2/3 of its pandemic recession/depression drop. So if you had bought for the first time at the market bottom, your assets would be worth 22% more today than just two months ago, which is an insanely fast rise.

So why are you still sitting on the sidelines?

Likely it has to do with continued fear. You are afraid the market is going to drop again. Afraid that the market is disconnected from the actual US economy, given our horrific economic state, soaring unemployment, continued lockdowns and ongoing social distancing. Afraid that other investors must be nuts driving up stock prices in the teeth of the pandemic and impending business ruin. Afraid you’ll soon need the money you have stashed away, as your personal employment status suddenly got a lot less stable. 

To the last one of these, I say good for you. You should always have enough savings to see you through for a while— if you can afford it, you should have stable savings sufficient for three years or so: cash, money market funds, corporate and municipal bonds whose prices fluctuate relatively little and can be sold for cash to pay living expenses. 

And, it bears reminding that the stock market is not the actual economy. In fact they’re only distantly related, regardless what the current occupant of the White House believes. The economy is the state of earnings and expenditures and capital investments right now, whereas the stock market is forward-looking, concerned with what will be happening next quarter, next year, next 5 years. 

But if we’re talking about your nest egg, your 20-year retirement savings or your 5^th grader’s college fund or something similar, money you don’t plan to need for at least 5 years, you should be jumping back into the stock market with both feet. Because it’s moving without you. 

Let’s be clear, however: the market is not moving together, of a piece. Entire industries are suffering and remain in great danger due to poor economic conditions and a bleak outlook. This is not a time to be buying index funds and other broader-market, diversified assets. This is a moment for microtargeting. This is a moment for the tactical stock-picker. 

In this environment, certain types of businesses will be absolutely crushed. Many of us can’t go out, and even more of us are choosing not to. Which means a company that depends on customers physically showing up is not likely to recover soon. Live sports and concerts, theaters, theme parks, restaurants and bars, ride sharing and home sharing, shopping malls, airlines, cruises, hotels, gym chains— all are tightening their belts, cutting hours and staff, accepting help from government or private equity to flesh out their cash positions, figuring out how to ride this thing till the moment changes. So immediately we can rule out these businesses as viable investments in the near term. 

But on the other side of that coin are all the companies which are likely to do well in exactly this environment, or which are already succeeding: Online shopping. Software as a service (SAAS). Social media. Video conferencing. Remote documentation. Cloud storage. Streaming video. Digital/mobile payment processing. Gaming. None of these requires customers— or in many cases, even employees— to be present in person to conduct business. And some are actually designed to be distance-based businesses, down the their formative DNA. 

Not surprisingly, many companies in this category have done well since the start of the current crisis. Several larger businesses have actually become more valuable in 2020, suffering no stock price drop whatsoever as they are able to leverage an environment where many people are stuck at home most or all of the time. Amazon (AMZN), Microsoft (MSFT), Facebook (FB), Google (GOOG), and Apple (AAPL)— often referred to collectively as FAGA or FAMGA (though Google is technically now a subsidiary of Alphabet)— have all seen their stock prices rise so far this year. In fact, these five are now so massive, worth roundly $1 trillion each, that they together make up 20% of the value of the entire S&P 500. And they’re still growing.

The big 5 held up against the smallest 350 companies in the S&P500. 

They represent 20% of the entire index – Y Charts

So that’s one way to invest: only buy the giants, the companies not just strong enough and rich enough to weather the downturn but whose very structure and product offerings make them uniquely viable in a time of dire economic stress.

Yet if we pull back further and look at a larger number of businesses likely to benefit from this trying time, there are many more to choose from. Zoom (ZM) and Docusign (DOCU; online document editing, secure signature and storage). PayPal (PYPL) and Twitter (TWTR). Salesforce (CRM; cloud-based customer relationship software) and Shopify (SHOP; online retail storefront software, hosting, payment processing). Wayfair (W; internet furniture market) and Activision Blizzard (ATVI; downloadable and online gaming). Netflix (NFLX) and Home Depot (HD). A number of these businesses have seen a surge in customers and sales since the start of the pandemic; some are runaway hits. All are well-run long term businesses with quality products, strong competitive positioning, a healthy balance sheet and a viable plan for the future. Their impressive results are in defiance of a moment when the rest of the economy is doing so poorly, and they are largely responsible for the stock market’s substantial rise since late March. 

America’s favorite career investor, Warren Buffet, has often said that one of the keys to his success has been “to be fearful when others are greedy, and greedy when others are fearful.” In other words, when many investors are jumping into a fast rising stock market, it might be time to pull back... But when other investors are apprehensive and worried about falling prices, it’s probably a good time to buy.

Right now, I choose to be greedy.
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By all means, reach out and ask me a question, or pick my brain a little. I love chatting strategy, and I'm always happy to talk stocks.