Why is the market still going strong? – Opinion

Market is going up

All before September 1st, the headlines displayed praise for the market’s outstanding numbers. Companies have crushed their earnings reports, and it seems like no one can lose in this market.

The Market Crash

March 2020, brought about the largest stock market crash since Financial Crisis of 2008. Let’s make a quick comparison to a historic market downturn: Black Monday (1987).

On October 19th, 1987, the stock market plummeted 31% over the course of a couple months. It all started on a dreaded Monday, Black Monday, when the Dow Jones dropped more than 20% in a single trading day and triggered a global market decline.

The Recovery

Black Monday 1987 stock market crash
Black Monday recovery chart via The Motley Fool

After the dust cleared from the Black Monday event, the recovery was in effect. It took two years for the markets to return to the same pre-crisis highs. By summer 1989 the market was back on track. It took our coronavirus crash about four months to recover, and now we are already reaching new highs.

The are two major reasons, in my opinion, why the market has crushed it since March. Firstly, the central banks around the world have done everything they have in their power to support the economy. More specifically, the Federal Reserve signalled they can provided unlimited quantitative easing to keep the economy afloat. In a press release, the Fed announced they would continue purchasing assets “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” The moment investors heard the good news, the market became a runaway freight train.

The second reason why the market has recovered this quick has to do with the type of crash we experienced. The reason why the market dropped so rapidly was due to the world literally shutting down. Other than this reason there was no real sign of the markets stopping so abruptly. Nevertheless, the stock market was already overvalued pre coronavirus crash. Once the economy started opening up and signs of normality returned, combined with unlimited QE from the Fed, the market had just enough boost.

Where do we go from here?

We cannot shy away from the basics in this environment. My best description of the market today is euphoria, with some investors probably new to the scene experiencing FOMO and are in search of new wealth. There is a sense of a “the worst is behind us” mentality, and I fear there is still more to come for a few reasons.

The central banks have kept interest rates low enough to bolster the economy and encourage spending. In the long-run, however, this is not sustainable. Coronavirus did serious longer lasting damage. Unemployment has increased to 10% in countries like the US and Canada. We haven’t realised the true impact on labour due to the furlough scheme.

Protecting your wealth

In order to prepare against uncertain conditions, diversification is strongly recommended. Remember that with interest rates held low, and the money supply inflating, hard asset prices increase. The purchasing power of the money you hold now is slowly diluting, and to preserve your wealth you have a couple options.

Real Estate – Not just any real estate but ideally prime property in certain locations will give you a better preservation of wealth than others.

Gold – This precious metal I’ve spoken of before and many before me have about the benefits of having gold in their portfolio. Gold has been a storage of wealth and a medium of exchange for other 2000 years. It is recession tested, and due to scarcity it has kept value. You can’t print gold, you can only mine it, and the supply doesn’t get manipulated like fiat currency.

Bitcoin – The cryptocurrency space is one that has a long of skepticism, but I still advocate its value. Bitcoin is dubbed by some supporters as ‘digital gold’ due to its limited supply. It can only be mined, and the difficulty of mining increases over time. It may take more time to be accepted globally, but Bitcoin shows characteristics of a great hedge against uncertainty.

All we need is focus

We take in so much information on a regular basis, and it becomes increasingly difficult to remain focused at times. Make sure to take time reflecting on yourself and decision making. When it comes to the markets, always do your homework, or as a friend of mine says, “do your own research!”.

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