Many of us have experienced a very difficult time during the COVID-19 epidemic. All of us want to return to normalcy, and to be able to enjoy the same activities that we enjoyed before the virus infected our communities and countries around the globe. For Mr Market, however, COVID-19 seems to be a distant memory. The S&P 500 has recovered 39.7% since its March 2020 bottom and reversed all of its losses for the year in just 11 weeks.
This pattern is not only true in the U.S.
This pattern is not only true in the U.S. but also in other major economies such as China, Germany and India. Stock markets tend to rise over the long-term. Why is this?
Before we get into the reasons, let’s first define the stock market. The stock index is usually used to report that the stock market rose by 2% today. A stock index is basically a collection of stocks that attempts to reflect the entire stock market or a subset thereof.
The S&P 500, for example, is a collection of 500 stocks in the United States from different sectors, such as IT, healthcare, financials and consumer discretionary. It also includes communication services, industrials and consumer staples, energy, utilities and real estate. The market cap weight of the index determines how large companies make up the S&P 500. 28% are the top 10 largest companies, accounting for about 25% of the S&P500’s weight.
We wrote articles here and hier about how to safely invest in stock markets during uncertainty. If you didn’t get to the COVID-19-crash and subsequent rebound, you might be wondering if you can still invest.
The answer is not simple. There are some things to consider before you make any investment in the market.
1. FOMO is a reason to not rush.
You don’t want the market to rise so you rush to buy stocks. It would be an example of FOMO (fear of missing out) and you wouldn’t want to be the one left behind in a stock market bull run.
FOMO will always lead you to purchase stocks at higher valuations because you are motivated to buy when the markets are growing. If you are also the type who sells stocks when markets are crashing then you will be a classic case where you buy high and sell low. This is not a great way of making money.
It is notoriously difficult to predict which direction the stock markets will take in the short term. This is because it is impossible to predict the behaviour and actions of the millions of people who are part of the market every day. If you believe that the stock market will only rise, you are wrong.
2. Find out which stocks still have good value
Although we don’t know where the market will go, we can tell if certain stocks are still a good value despite recent stock price increases.
Alphabet, the parent company of Google, was at its lowest point in March when the pandemic began. However, it has since recovered to close to US$1,400. You’d have some nice gains if you invested back in Alphabet in March or April.
If you haven’t taken action on Alphabet yet, does that mean it is still a good time to invest? It is possible to compare its current valuation against its historical averages over the long-term. Here is a chart showing Alphabet’s P/E ratio for the past five years.
Alphabet trades between 25 and 35 times earnings, with its median five-year P/E ratio of 30.98. Alphabet currently has a 29.22 P/E ratio. Alphabet’s current P/E ratio is 29.22.
( Side note To account for the spikes in P/E that were due to a one time tax hit Alphabet took to repatriate foreign income to the U.S.
Alphabet may not be as cheap as it used to be a few months back, but it is still a good deal considering how great a Google business is.
3. Industries can still be affected by COVID-19 down the line
The stock market is now back to pre-COVID levels but our economies are still in trouble. As states try to open their economies, the U.S. is experiencing new infections in the Sun Belt and West Coast . After 56 days without any local cases, Beijing authorities confirmed the existence of 106 new cases. How governments manage to contain new clusters of cases as quickly as possible will be key.
Some industries may need to wait longer to get back to normal due to uncertainty. According to industry insiders, it could take up to three years for air travel demand to fully recover . We’ll see domestic tourism rebound first, and then there will be a revival of international tourism through the creation of’travel bubbles”.
Sales in the retail sector fell 16.4% in April, according to the U.S. Retail sales in Singapore and Hong Kong plunged 40.5%, and 36.1%, respectively. We are starting to see signs of recovery as economies emerge from lockdowns. The prices of Singapore retail REITs are fairly recovering in anticipation of malls opening.
There are still questions about what would happen to industries more susceptible to the virus if another wave hits. Be aware of the risks associated with investing in these industries. However, if we keep our eyes on the long-term, COVID-19 will not affect our lives or economies.
4. Wait if there are no chances
Despite the recent rise in stock markets, I believe there is still plenty of opportunity. wait if you are unable to find the right investment for your portfolio. You don’t want any FOMO to prevent you from investing before you do your due diligence.
Keep an eye on high-quality stocks and save money for future investments. Although we cannot predict when stock markets will crash, the past has proven that it will. You should be ready for the next crash if it happens.
The fifth perspective
The COVID-19 crisis was unique in the sense that it was the fastest market crash and recovery in history. From peak to trough, the S&P 500 declined 33.9% in the span of just 33 days, and then took 11 weeks to recover. In comparison, the Global Financial Crisis took three years to fully play out.
For those unprepared, the speed of the crash and recovery caught many by surprise. But for those who had a system of investing in place, the COVID-19 crisis was a great time to pick up many stocks at hugely discounted prices.
Will COVID-19 rear its ugly head and wreak havoc on markets worldwide once again? Your guess is as good as mine. But either way, our focus remains the same – which is to invest in high-quality companies whenever the opportunity presents itself.