Investing Lessons Learned from the Pandemic

The global crisis has been just one of many challenges for investors

On Sept. 21, 2021, Investopedia teamed with a fellow member of the Dotdash Meredith publishing family, Verywell, in hosting a unique virtual conference titled “Your Money, Your Health.” The investing-oriented panel discussions during that conference included “Investing Through the Pandemic: How the Pandemic Has Changed Investor Behavior and Impacted Global Markets” and “Healing the Economic Scars of the Pandemic.” Among the topics that were addressed in those sessions were investing lessons from the pandemic, in addition to the future of fiscal policy.

Financial experts who participated in these sessions included Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc., and Ethan Harris, head of global economics research at Bank of America Merrill Lynch Global Research. Below, we offer key excepts from their most recent research notes.

Key Takeaways

  • Large numbers of new, inexperienced investors are trading stocks.
  • How they will respond in the next bear market is a key concern.
  • Their ability to choose stocks wisely is disputed by Warren Buffett.
  • The Federal Reserve’s easy-money policy has burdened many savers and investors with negative real returns, creating a de facto tax on their wealth.

From Liz Ann Sonders

Breadth in the S&P 500 remains fresher than either the Nasdaq or Russell 2000, but it’s also been deteriorating. Generally, market breadth indicators highlight the percentage of stocks in an index trading above moving averages; or the number of stocks rising relative to the number that are falling—often incorporating volume statistics as well. An analogy often used to explain why breadth matters comes from the battlefield. When the generals are on the front line, but the soldiers are lagging behind, the force is less powerful than when the soldiers are on the front line alongside the generals.”

“[T]he percentage of S&P 500 stocks trading above their 50-day moving averages peaked in April, troughed in June, improved until recently, but has come under pressure again. The same can’t be said for the Nasdaq and Russell 2000, which both peaked in early February, since which time they’ve generally been descending. Relative to their 200-day moving averages (DMA), all three indexes have been generally trending lower since April.”

From Ethan Harris

“Turning first to the U.S., two developments have made us very cautious on the near-term outlook. First, the U.S. has in effect hit a big supply-side speedbump. Supply shortages remain at severe levels, and job openings continue to set new records. The second development is the COVID surge. The economic impact of the [D]elta wave is already visible in the data. Retail sales (ex-autos) fell by 0.4% in July. Moreover, meaningful weakening in the Homebase small business and UKG high-frequency data points to risks of a weak August payroll print. As a result, Head of U.S. Economics Michelle Meyer and team have cut 3Q GDP growth to 4.5% from 7.0% and overall 2021 growth to 5.9% from 6.2%. However, looking ahead to next year, the team continues to be much more bullish than the consensus due to very strong demand fundamentals and the prospect of additional fiscal stimulus.”

"China is also entering a soft patch, but with a bit different timing and causes. ... While recent setbacks in the U.S. and China have disrupted the global recovery, it is important to note that we expect the slowdowns in both countries to be short-lived. In the U.S., we think gradually-easing supply constraints and an improving COVID situation in the fall will allow for strong growth of 6.0% in 4Q. Economic activity is also likely to pick up in China as policy eases. Of course, much will depend on how COVID plays out: [I]n particular, the size and timing of a potential winter wave will be crucial.”

Warren Buffett on Stock Picking

During the Berkshire Hathaway Inc. (BRK.A, BRK.B) 2021 annual meeting of shareholders on May 1, Chairman and CEO Warren Buffett repeated his long-standing suggestion that the average investor lacks the ability to pick individual stocks well and, thus, should invest instead in an S&P 500 index fund. To illustrate the difficulty in picking long-term winners, he presented lists of the top 20 largest companies in the world by market capitalization in 1989 and today. None of the top 20 in 1989 are still among the top 20 today. Also, the largest company by market cap today, Apple Inc. (AAPL) at over $2 trillion, is more than 20 times more valuable than the largest company in 1989.

“Be aboard the ship,” Buffett advised. “You couldn’t help but do well if you have a diversified group of U.S. equities.” In a swipe against active trading, he commented that making “30 to 40 trades a day” is not a wise way to invest.

Surge in Retail Investing

Buffett’s comments come amid a surge in retail investing, with estimates indicating that more than 10 million new investors have entered the market during the first half of 2021, about the same number recorded in the entire prior year. This has fueled explosive growth at brokerage firms such as Robinhood Markets Inc. (HOOD) and has encouraged, among others, payments processor Square Inc. (SQ) to enter this booming industry. Digital payments platform PayPal Holdings Inc. (PYPL) also has created a stir with its progress toward offering brokerage services.

It remains to be seen whether this represents a constructive democratization of investing, as proponents claim, or a destructive speculative binge, as critics warn. A related unknown is how all these new investors will respond to the next major market pullback.

In 2020, as the COVID-19 crisis broke, a brief but sharp bear market was triggered that saw the S&P 500 Index plummet by 35.4% from its intraday high on Feb. 19, 2020, to its intraday low on March 23, 2020. By August 2020, nearly all of the lost ground had been regained. Still, this sharp decline tested the mettle of many experienced investors, let alone that of neophytes with no prior experience of similar downdrafts.

Fed Policy Burdens Savers with Negative Returns

Meanwhile, the Federal Reserve (Fed) continues to keep interest rates at historically low levels, to stimulate the economy and prop up asset prices. At the recent Jackson Hole Economic Policy Symposium, Fed Chair Jerome Powell indicated that the central bank “will continue to hold the [current] target range for the fed funds rate.”

While this easy-money policy has propped up stock, bond, and real estate prices to the benefit of some investors, it has been detrimental to other savers and investors who depend on streams of interest and dividend income. As of Aug. 16, 2021, the Federal Deposit Insurance Corp. (FDIC) reported that interest rates on bank deposits ranged on average from 0.03% per annum on interest-paying checking accounts to 0.27% on 60-month certificates of deposit (CDs). Yields on U.S. Treasury securities with similar maturities ranged from 0.07% to 0.69%.

Given that current measures of inflation are running from 3.6% to 4.2%, as noted by Powell, and that the Fed’s long-term goal is to keep it at about 2%, many savers are thus facing protracted negative real returns (i.e., adjusted for inflation) on their money. This, in turn, represents an effective tax on their wealth. How savers and investors can cope with this reality is another major issue going forward.

Article Sources
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  1. Charles Schwab & Co. “You Take My Breadth Away: Market’s Underlying Deterioration.”

  2. BofA Securities via Internet Archive. “Sputtering Engines of Growth.”

  3. Investopedia. “5 Takeaways from the 2021 Berkshire Hathaway Annual Meeting and Quarterly Earnings Report.”

  4. Investopedia. “PayPal (PYPL) May Offer Stock Trading.”

  5. Yahoo! Finance. “S&P 500.”

  6. Investopedia. “Powell Signals No Fed Policy Shift at Jackson Hole.”

  7. Federal Deposit Insurance Corp. “National Rates and Rate Caps.”

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