Investing During Uncertain Times

Note: This was originally published in June of 2020 while our world in its full entirety was facing one of the deadliest pandemics we have ever faced in the modern era.

Hey, what’s up, everyone. This is Henry here at Disruptive Money Management and today we’re going to be talking about investing during uncertain times.

It’s currently June 2020 and we’re still battling our way through the COVID pandemic. These past few months I have been asked on numerous occasions about investing during these uncertain times. Today is the 8th of June 2020 and as many of you may recall, the S&P 500 had bottomed out back in March at a negative 35% and as of today, it is back to being flat. To call it a tumultuous ride is saying the very least. 

To paint the picture of what’s happening in America today: we’re seeing unemployment numbers at a record high of 40 million Americans. Restaurants, bars, and stores are operating at reduced hours and limited capacity. Some are still not even open yet. The majority of America is still working from home. Cases of COVID are still on the rise, not at the speed as it was two months prior but still on the rise. We are seeing riots happening in major cities across the country and protests over the murdering of George Floyd while in police custody. 

Yet, the stock market thrives. Even at half the number of flights, airline stocks are soaring, cruise stocks are sailing off, and the technology sector is rocketing towards the moon. The consumer retail sector is opening back up and even having suffered store closures, the stocks are being lifted higher each passing week. 

This leads me to point number one which is the stock market is not the economy. The stock market is not an indicator of overall economic conditions. Yes, the stock market responds to economic conditions but it is not a direct correlation to it. So, what is the stock market correlated to? Most of us would be lead to believe that it is based on a company’s current financial standing and where it is expected to be in the future right? Price to earnings ratio, debt load, expected revenue, etc. etc. 

But yet with shuttered stores and decreased revenue, share prices are still pushed higher. So that can’t be right. So what is it if not that? In order to understand whether or not to invest in the stock market, we’re going to do a quick recap of what drives common stock prices.

There are three driving forces to a stock’s price and that is fundamental factors, technical factors, and market sentiment. It’s that last one, market sentiment, that is surging stock prices right now. I’ll come back to this in a quick minute.

Fundamental factors, as discussed, are values such as earnings per share, or EPS, and price to earnings ratio, otherwise known as the P/E ratio. EPS is simple enough to understand, it is the company’s profit divided by the number of outstanding shares of its common stock. This is designed to easily determine a company’s profitability. If you have a company that has a revenue of $200M dollars and 2M outstanding shares and let’s say that company increases revenue to $250M with those same 2M outstanding shares, then EPS goes up thereby increasing the value of the common stock price. If revenue decreases with the same shares then common stock price decreases. Additionally, if new shares are issued or if the stock gets split then EPS also gets adjusted. 

That P/E ratio is based on where the company was and where it is expected to be in a future period adjusted for current day prices. So, essentially, what you are willing to pay today for a company at its current speed of growth. It is important to know what a company has done because that sets the benchmark for expectations. If we know a company has done $250M in revenue during the last 12 months and it is on track to hit $275M in the next twelve months then we know that the company is growing at a good pace. Now, if it has been tracking backward or not really moving at all, then we know that the company perhaps is not poised for good overall growth. 

Technical factors are easy to understand. It incorporates things like inflation, the economic strength of the underlying market-not the stock market as a whole but the market in which the particular company is contending in. So the tech market, real estate market, retail spending market, etc. etc. It also takes into consideration the strength of its main competitors. Taking Ford as an example, the technical factors for Ford right now would be whether or not the automotive industry is faring well. It considers whether the overall vehicle sales market has demand. It would take into consideration its major competitors like GM, Honda, and Toyota. There are some other factors that are often talked about in finance courses like substitutes and demographics but quite frankly, those areas are not as important in today’s environment. 

The final point of consideration is market sentiment. Market sentiment is the public investor’s views on the overall company. If the consumer market has strong positive or negative feelings about a company, its investor dollars can drive prices through supply and demand. If we go back to the early 2000s, market sentiment may not have been a huge factor but here in 2020 market sentiment of a company is much much valuable than ever before. 

Because important to market sentiment is the other consideration which is the market barrier. The barrier to the market has now all been eliminated to consumer investors. Again, going back to the early 2000s, if you wanted to buy a stock you had to pick up your landline, call your stockbroker, request for prices, and place a trade. Fast forward to 2010 prior to the influx of smartphone apps, we still had to log into our trading platforms like Fidelity, Schwab, or ETrade and at that time most likely through a desktop or a laptop just to place a trade. It was not easy and intuitive...it wasn’t on the go! At that time, we still had to pay commissions so it also wasn’t very cost-efficient to constantly buy stock. 

Well, a lot has changed since then. The extreme popularity of company 401(K) plans ensures that every two weeks on payday, millions to maybe billions of dollars are being shifted into the market via employee contributions and company match money. This massive tidal wave of money going in is like clockwork. Payday Friday-BOOM! Two weeks later, BAM! Money just flooding into mutual funds which then gets divested into stock purchases. Regardless of fundamental or technical factors, shares of company stock are being bought every two weeks. 

Additionally, all major brokerage houses have smartphone apps allowing us to trade on-the-go. I can be catching the bus to work, reading on Google News how Amazon is seeing an increase in consumer demand and without missing a beat, switch over to my trading app and buy a stock right then and there. All with one hand and without the need to communicate to a live person! This major onset of tech has been driven by disruptors in the industry… early disruptors like Robinhood and the more recent Webull have created apps catering to mainstream millennials. These beautiful platforms that are easy on the eyes and super intuitive. Their not without their problems but again they have sign-up bonuses and you can get free stock after making deposits. I don’t know about you but as a millennial myself I love sign-up bonuses and free stock. 

So with entry to the market having been completely eliminated, people that previously would never have traded stocks before are now trading stocks. We’re buying at a rapid pace, much more so than the generations previously because it’s easy to do so. With the barriers having been eliminated, more money is flowing into the stock market than ever before and unlike previous generations, there is a lot of that money flowing into companies based on emotions. 

To these millions of millennial investors, it is not about fundamentals or technicals. It’s really just “do I like this company? Do I use these products or know of others who use these products and services? Do I see myself using them in the future” And if those answers are yes they will have a higher likelihood of buying that company’s stock. And that is why unprofitable companies like Tesla, Uber, and Pinterest just to name a few are trading at higher and higher prices. To many investors, it is not about the earnings momentum but rather about owning a piece of a company that tugs at their heart. And that emotion is much more valuable right now than actual numbers.

So, going back to our conversation starter of investing during uncertain times. The answer is yes, we should be investing when the market is fluctuating. We should be investing during a downturn if we are financially capable of doing so. We should not stop contributing to our 401(k)’s because saving for our future is important. Capitalizing on the company match is also a no-brainer. When we see the share prices of Fortune 500 companies tumble we ought to look at it as an opportunity to buy those shares at a discount. Because COVID will pass and the unemployment numbers will decrease, the economy will recover and like 2008-2009, you don’t want to have sat on the sidelines for years and missing out on the recovery that immediately followed. 

What’s more important to investing during uncertain times is repositioning and rebalancing your portfolio. Ensuring that you are capitalizing on this opportunistic moment to buy shares of companies that are not only poised to grow but are experiencing growth in these uncertain times. 

And that’s it for today, my friends. Stay healthy, stay safe, and stay prudent.