William Frisby

William Frisby

Watching the COVID high

The COVID-19 pandemic has created one of the worst economic periods in history, yet financial markets are setting all-time highs. In this article, I take a look at why there is such a big disconnect between financial markets and reality.

Believe it or not, investment markets are at a near all-time high! Sounds hard to believe doesn’t it, considering that the world is in the middle of a pandemic where we are seeing endless amounts of people dying, losing their jobs, salaries being halved or lost and businesses going bankrupt by the day! Yet, the S&P 500, an index of the 500 largest companies in America, is sitting at 3,349 as opposed to its all-time high of 3,394 from February this year. As America is the world’s biggest economy, the S&P500 is an important measure of how well the world economy is performing. So, if you were to land on earth from a different planet, you would be well within your right to believe that the world’s economy is in a really good position.

How is this possible?

Tech and healthcare companies make up a large part of the S&P 500 and COVID-19 has been very positive for these sectors. eBay and Amazon are making billions out of our locked-down lives. In July, Jeff Bezos added $10 billion to his net worth in one day. Also, the hardest-hit industries like hotels, restaurants and airlines make up a slim portion of the S&P 500 index, so their misery is having little effect on its performance. But in our opinion, this isn’t the real reason why the S&P 500 is so high.

For years we have seen the markets not truly reflect the state of the world economy and what we are seeing here is no different. Financial markets work on confidence and the influx of investors money. When they crash, like they did earlier this year, it creates an opportunity for investors because stocks are cheaper to buy. Imagine walking past your favourite shop and there is a 50% sale on, you’d run in an buy as much as you could afford right? This is precisely what happened to markets this year and we are still riding this wave of confidence. But, as we reach all-time highs again is this where we might see another watershed moment?

Why don't we just invest in tech and healthcare companies then?

The simple rule of investing is: buy low, sell high. At present, a lot of these companies are at a high. Amazon has seen incredible success this year, which couldn’t have been predicted to this extent. But tech companies are fragile as it is one of the fastest moving spaces in the world. Look back at the 1980s when Sony and Japanese technology ruled the world. Today, Sony and the Japanese economy are now a mere shadow of their former selves. What happens is Jeff Bezos or Elon Musk are struck by lightning tomorrow? We have seen how the loss of an inspirational leader can result in years of failure with companies like Manchester United following the retirement of Sir Alex Ferguson. Picking individual stocks is so difficult and too risky for normal mums and dads.

Heavy charges or poor management often lead to below-average returns

The health sector again is also at a very fragile stage. Currently, hospitals are full, drugs are being sold by the shipload and everyone is trying to create a vaccine. If one company develops the vaccine tomorrow then that company will make billions overnight. But the pharmaceutical companies that did not create the vaccine will have massively over-invested into a failed endeavour. Do you know which company has the magic formula for the vaccine?

Is there a crash around the corner?

If we go back to the S&P 500, then we believe that there is potentially a very big crash around the corner. At some point, the markets have to realise what condition the world economy is in and a correction will happen. It is the job of big banks, investment houses and pension providers to protect their clients and shareholders money and this could result in a massive sell-off, resulting in share prices falling by the second.

What should I do?

Realign your investments. There are investment funds that make money when markets head south and there are also investment managers who are good enough and fast enough to react appropriately to market changes. But, you can only take advantage of their skills if you move your investments before the crash happens.

William Frisby

William Frisby

Director
Hampton Bridge

Can I help?

The COVID-19 pandemic has been difficult to deal with for everyone. Don’t let it have a negative effect on your finances. If you feel like you are not getting the help you need during this difficult time then get in contact with me today.