July 2014 changed my life. I left my 14-year Wall Street career, moved my family to Florida, and started a business from scratch. By early 2016, I was still struggling. I felt alone and adrift. It was hard, and I needed inspiration.
So, I read a book titled "438 Days." It documents a survival journey. Spanning 14 months, Jose Alvarenga drifted in a fishing boat over 7,000 miles. The guy survived the unimaginable floating from Mexico to the Marshall Islands. It's a cool story at BBC.
Now, imagine if his trip started 14 months ago in May 2019. Last year wasn't great for many. In my own family, we endured hospitalizations, emergency surgeries, and even cancer. Thankfully, we emerged victorious. But when the ball dropped on 2019, many people were ready to give 2019 the proverbial finger. Goodbye '19 – hellooooooooooo '20! How naïve we were.
No need to recap 2020, but had you been Alvarenga, you would've arrived to find everything different. I am usually asked how I think the year will finish out. It happened again last week for 2020. A special year deserves special treatment.
First, we'll look at how 2020 compares to the 1918 pandemic. Then, I'll discuss how I think headlines will resolve. Finally, we'll review what big money did and what it will likely do by end of year. We're adrift in our boat … it's a perfect time to reflect.
1920 vs. 2020
In 1918, earth's population was 1.8 billion. Spanish Flu infected an estimated 500 million and killed as many as 50 million: a 28% infection rate and nearly 3% death rate.
While medically serious and seriously scary, COVID-19 currently has an infection rate of 0.2%. The Centers for Disease Control and Prevention (CDC) estimates that infections are potentially 10 times higher, possibly 2%. The current death rate is 0.01% of the world population.
The year 1920 saw us surviving a World War and the Spanish Flu. But the post-quarantine and wartime '20s brought an explosion of prosperity and innovation: cars, radio, cinema, aviation, and TV. Then came the crash of 1929.
Afterwards, stocks began their march higher. Here's 100 years of the performance of the Dow Jones Industrial Average:
That barely visible green dot is the coronavirus market collapse. Yes … that little thing.
News is scary. News media companies make money through fear. When happy and relaxed, you won't click the story. When rattled, you will. Conveniently, you'll see an ad. News sells ads. It's that simple.
COVID-19 is a real threat. It's killing many and making many more ill. But that doesn't mean media won't capitalize off a scary event, which means amplification and even distortion of fact. Above, I said the Spanish Flu was 100 times worse than COVID-19 on a percentage basis. Now, that doesn't mean I think it's nothing to worry about, but I do think that the distortion occurs in all media – including financial. Here's how I think big stories resolve:
- Doom-and-gloomers expect dismal second quarter earnings and many through to the third quarter. But I believe that third quarter results will be strong on a sequential basis.
- America's polarizing reopening debate will begin to settle. States are forced to take things more seriously, with some requiring masks, and carefully handling the school reopening question.
- Stock market bears will find disappointment yet again. The full year of 2020 will find the S&P 500 somewhere between flat and +7%. Let's take the middle and call it a +3.5% year.
I believe that stocks will continue to find support from several factors:
- I assume a Trump re-election. It's a highly charged topic, but I'm unemotionally giving my assumption based on precedent and the current landscape.
- I believe that a vaccine for COVID-19 will arrive sooner than markets anticipate. Hundreds of firms worldwide are working on possibly the biggest blockbuster drug of all time. Jonas Salk created the Polio vaccine but selflessly gave it to the public domain for the greater good. I doubt modern capitalism will do the same.
- The Fed will continue shadowy support for stocks. It has bought troubled bonds, exchange-traded funds (ETFs), and historically took equity ownership in "too big to fail" entities. I believe that the Fed might even begin to directly purchase stocks to calm frazzled markets, if necessary.
- That said, we should see one healthy and moderately scary market pullback before year end. That will be a buying opportunity for savvy investors big and small.
Technology has been the biggest driver of market strength this year. My research firm looked at which sector got the most appearances on our top 20 buy report in the past six months. Look how much was tech:
Health care was second largest. Big money is flowing to those two sectors. That should continue. Cloud computing, remote office, and social media drive tech commerce. Health care continues to collect capital in pharmaceuticals and biopharma firms, providing ongoing treatment and research and development (R&D) for vaccines.
Big Money in 2020
The 15-year average daily big money signals are 63 buys and 48 sells. This year has seen the expected daily average of 63 buys. However, average daily selling spiked to 85. That number was immensely skewed by huge selling from Feb. 24 to March 23. During that 21-day period, we saw an astounding 10,141 sell signals: and average of 482 per day!
Huge selling has historically preceded market rips the past 30 years. I called a market bottom for Friday, March 20. It happened on Monday, March 23. The S&P 500 then rallied 43%.
Big money has been buying ever since. The anticipated pause came, but the selloff didn't. Buyers returned recently, but sellers should cause a pullback before year end: a buying opportunity.
I believe that the best is yet to come for the United States. We may have much to fear: an unstable political landscape, social unrest, massive unemployment, and a deadly virus threatening our health. But we've seen it before, and we've been through worse. Each time we triumphed.
I see the glass half full. Others see danger, sadness, and fear: a glass half empty. It's all perspective. George Carlin had a way to illustrate everything is relative. He said: "Some people see the glass half full. Others see it half empty. I see a glass that's twice as big as it needs to be."
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds no positions in any mentioned securities at the time of publication.