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Casual Investors Made Millions From The Recent Market Turmoil

Is it to late to join in?

Photo by Andrea Piacquadio from Pexels

Markets around the world have been gyrating wildly in recent months. But casual investors have made millions, even as Wall Street panicked about the coronavirus pandemic’s long-term ramifications. Buyers snapped up beleaguered stocks in the aftermath of news about the spread of COVID-19, and are now cashing in as the market recovers to its pre-virus peak. Experts are still stumped, with many believing that the wholesale recovery of assets is an upward blip, driven by irrational optimism. The economy will continue to slide in the months ahead according to their analysis, just as it has in previous recessions. 

The market seems to be diverging into two camps. Retail investors seem to believe that the market is heading higher and that the fallout from the pandemic isn’t as high as many expect. But professionals are taking the opposite view, anticipating pain until 2023, and perhaps the rest of the decade. 

The mismatch in opinions reflects the intellectualization of financial markets. Professional investors work on their assessment of the state of the world and individual companies. They create hypotheses and bet their money accordingly, plowing it into stocks they think will win over the long-term. Their predictions about the future state of the world depend on what they believe is likely to happen, based on economic theory and what has happened in the past. 

The coronavirus pandemic, however, is radically different from experience. It is a genuine external shock to the economy, hitting the demand and supply side of the economy at the same time, something we haven’t seen before on a global scale. Importantly, there is no obvious financial element to this particular crisis, as there were in the past, so it is unclear how the market will rebound. After such a massive contraction in output, you would think there would be some long-term consequences for recovery. Still, with each passing week, that seems less likely. 

The FTSE and DJIA fell around 40 percent towards the end of March as governments around the world announced lockdown restrictions on their populations. Panic gripped investors—many based their decisions to sell on Chinese data concerning the severity of the virus. Initial data suggested that it might kill between five and ten percent of people, despite WHO protestations that the actual death rate was a more modest two percent. 

Photo by Lorenzo from Pexels

As more data emerged in western countries, it became clear that the world wasn’t facing the new bubonic plague. The virus seemed to be killing much less than one percent of infected people, most of them old and sick. Markets, however, still weren’t sure how the pandemic might play out. The risk of losing vast swathes of the population seemed to be off the cards, but investors had no idea how long the lockdown would last or how severe it would be. From the perspective of March, it wasn’t clear how things were going to work out. Layoffs were in the millions. The charts appeared to indicate a depression similar to the one that people went through in the 1930s.

It’s now July. Some retail investors are laughing about the panic of the mainstream investing establishment just a few months earlier. With most professionals predicting doom and gloom, retail investors all over the country, flush with cash, began pouring into beaten-down stocks. The bond market saw returns plummet, as pension funds looked for safety and exited airlines. But the underlying reality of the economy didn’t reflect the swings in the stock price. The most recent data suggest that activity will return to normal rapidly, with companies on a hiring spree. 

The tools for winning in the markets are also getting better for the average person. Most retail investors now know how to use a demo account, meaning that they can practice their skills without having to risk their money. It seems like the average person has beaten Wall Street this time around, which rarely happens during standard times. 

Perhaps the reason professional investors have done so badly is that they followed the advice of economists. Economic analysts rejected a fast, V-shaped recovery as the crisis developed, telling the world that it was in for substantial pain in the years to come. The effects of the shutdown, they said, would continue to reverberate for years. The economy is a delicate set of relationships, and the end of economic activity meant that it would take a long time to restore it to full health. 

With millions of jobs being lost every week in March and April, you can understand the root of their concerns. But the data in May seemed to upend those existing theories. Wall Street thought that the economy would shed 8.3 million jobs in May. In fact, it gained 2.5 million, pushing the unemployment rate down to 13.3 percent, not up to the expected 19.5 percent rate. 

To add insult to injury, the NASDAQ index broke new all-time highs in June, indicating investor confidence in the recovery. The majority of the market appears to be viewing the March 2020 crash as nothing more than a blip – and a rare opportunity for some investors to make a lot of money. Online apps have been touted this recent episode as a “generational buying opportunity.” Retailers plowed into stocks hit hardest by social distancing rules, predicting that life would return to normal soon, based on updated mortality statistics. 

Gyrations in the priorities of the economy have also helped investors. People are buying into the fact that healthcare stocks are likely to benefit from a world made sick by increasingly virulent viruses. Shares of pharma giant, Moderna, for instance, have risen more than 400 percent since their March lows. 

The unexpected stimulus checks are also expected to make a difference. People are likely to plough them into their stock portfolios instead of spending them in the economy. Many have been saving much more while at home than under normal circumstances. Ultimately, the stock market has become more democratized. It’s no longer the money-managers and hedge funds making all the decisions. 

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