- Extra cash bridging the financial gap
- Investing, speculating, gambling – many are turning to the stock market for excitement
- No market bubble today, froth in certain areas
Trillions of dollars have been injected into the global economy since the pandemic started. This financial influx has been a lifeline for many businesses and people that have fallen on hard times through no fault of their own. It has also helped the world economy avoid another depression, as the funding is helping to bridge between pre- and post-COVID-19 worlds.
Despite its intended benefits, a portion of this money have been given to people that don’t really need it. We know this because the savings rate (personal savings, as a percent of disposable income) has skyrocketed to levels not seen in fifty years in the U.S. during the pandemic. Many are indeed better off financially than they were a year ago. No doubt, there remains a lot of pent-up demand for services and experiences that we cannot do in lockdown and a lot of the cash sitting on the sidelines will be spent once our economy fully opens back up. This is a big reason why we are positive on the economy today.
Many are investing, speculating & gambling
Not all of the increased savings are going into bank accounts. Increasingly, people have turned to the stock market for excitement. According to Fortune.com, retail trading (trades executed by individuals for their own accounts) now makes up 20% of all U.S. stock orders vs. 15% pre-pandemic. This is a huge increase in a short period of time, and it makes sense. To paraphrase a recent comment from a client with regards to his “fun” money, “Since I can’t go to Las Vegas, I’m bringing Las Vegas to my TFSA”.
The rise of the retail investor isn’t necessarily a bad thing, but it has been a contrary indicator in the past. For instance, equity mutual funds saw massive inflows in the late stages of the tech bubble in 2000, just before the market crashed. We don’t see a stock market bubble today – in fact, we are quite positive on equity markets – but we are seeing a lot of signs of froth in certain areas and an increased level of risk-taking. Some examples include:
- GameStop – A chatroom of day-traders on Reddit.com called WallStreetBets banded together to bid up beaten-down old economy stocks such as GameStop. The result was a huge amount of gambling and speculation that drove GameStop from under $20/share at the start of 2021 to around $350/share by January 27. The move forced some large hedge funds to take massive losses. Some retail investors had large gains, but only if they had bought early and sold in time. The stock was trading around $60/share as of this writing. Undoubtedly most individuals that got caught up in the story lost money rather than making a fortune.
- Bitcoin – The cryptocurrency had a meteoric rise in 2020. Why? It’s hard to say. One theory is that it’s due to its gold-like qualities (safe haven in an uncertain world). Another theory is that with the continued digitalization of our economy, it will increasingly be used as an actual currency. But one has to ask: what use is a currency that has massive moves in value – both up and down – on a daily basis?
- Special Purpose Acquisition Companies (SPACs) – These are often called “blank cheque companies”. A SPAC raises capital to go public without any business because it’s simply a shell. Once public, these companies typically have two years to deploy the capital by acquiring a business. Around $85B was raised in SPACs in 2020. So far in 2021, the number is over $20B. That’s more than $100B being given to these companies in return for the promise they will eventually acquire a business. This number was less than $5B just four years ago.
- Electric Vehicle Stocks – Shares rose 10x in 2020 as investors got on board with a renewable energy. Certainly, the election of Democrats in the U.S. has helped drive this story forward. The future is bright for some of these companies, but is it really 10x brighter than it was a year ago? Extremely unlikely.
Speculation vs. disciplined strategy: What’s right for right now?
With a lot of cash in the system, very low interest rates and reasonable household debt levels, it’s no wonder we are seeing an increase in speculation in certain market segments. We pay attention to these trends but as long-term investors, we stay focused on what has proven to build wealth over time: solid financial plans, diversification and a focus on valuation. Unfortunately, there are no shortcuts. It’s very difficult to get rich quickly by investing in the stock market, but it’s very easy to get poor. Those that make big bets and win are eager to talk up their success and make for great headlines. They are rare. Those that make big bets and lose are usually much quieter but unfortunately, they are also much more common.