Back in June, the subject line of this paper related to the folly of opening up the economy in the middle of a pandemic. This is not to say that Sweden didn’t do it right or that we, in the US, did it wrong. No one can control a virus whether in a lockdown or anything else. There are greater powers at work here. The point of the missive regarding the re-open folly was to suggest that the stock market has basically said ‘mission accomplished’ and has come quite close to making new all time highs even before the economy has seen the worst of the shut down damage. But alas, the market is always right…and always wrong depending on your point of view. Stocks trade on emotions in the short term rather than fundamentals. With the closure of casinos and the stoppage of sports wagering, we now have Robinhood. A perfect example is the folly of Eastman Kodak. Recently bankrupt, the company suddenly gets a loan from the government that is larger than the company’s market cap and the stock shoots up over 2200% in a few days time. An interesting fact with this story is the volume of stock traded in the days prior to the announcement of the loan package. There will be indictments over this scam to be sure, but the story does point out the power of Twitter and other social media when it comes to momentum trading. There has been a trend of bankrupt companies suddenly springing to life on the exchanges through nothing but rumor on social media. The casino is open and this is rarely a positive for markets in the months ahead. What the newbies will learn over time is that chasing bankrupt company stock is not a winning proposition. I have had folks lament the fact that they ‘missed’ the Kodak trade. No worries. Just head to the casino with your mask on and place a few thousand dollars on red or black. It’s the same concept. What the latest crop of day traders don’t yet know is that for every big hit you garner through the momentum trade you will be sent down the rabbit hole on several others. It’s not a winning game to play, but it does release the endorphins in the brain and this is what is truly going on here…the action.
But something else is going on in the markets. It is undeniable that the economy will not look the same on the other side of the current virus panic. Will we have inflation or deflation as a result of the massive Federal Reserve and government stimulus? Stay tuned but be prepared for any outcome. ‘New economy’ stocks, that is anything to do with the cloud, artificial intelligence, electric vehicles or online shopping, while vastly overvalued currently, (or is the market right again?), may well end up as the new mainstays of portfolio managers while many industrial, financial and other ‘old economy’ companies may be tossed to the curb as the current investing trends indicate. I suppose it will depend on whatever is trending on your smart phones on any given day since if it’s on the internet it must be true.
Point of the story is that there is more of this market volatility coming as a slowdown of the economy is here and a vaccine is not. I hear J&J has a vaccine that worked on monkeys a few days ago so there is hope. What is truly unbelievable is that this virus, and people’s response to it, has been politicized to the point that perhaps the upcoming election may well be a referendum on the mask vs no mask crowds, the stay home or go out folks and the Hydroxy and get in school voters vs the yes, there is a virus out there folks. Go ahead and make your predictions, but please don’t invest based on it. People make plans and God laughs. My apologies to those that feel this is folly.