A Blog by Jonathan Low


Mar 4, 2021

One Year Later, How the Pandemic Has Changed Investing

A lot of it comes down to the effect of technology on people with money who cannot spend it on tangibles. JL

Larry Light reports in CIO Magazine:

Value stocks have had a fine time, for a change. Over the past six months, the Russell 3000 value index has outpaced its growth counterpart. Reasons range from a recovery in oil prices and expectations of rising interest rates. Amateur traders, mostly 20-somethings, who use online trading platforms to ride momentum stocks. The pandemic has been an accelerant for environmental, social, and governance (ESG) investments. Bitcoin becomes a thing. Long term rates nudge up.

The pandemic’s poisonous spread has killed a half-million Americans and devastated the US economy, with similar wicked results everywhere. Small wonder that some 12 months after it appeared, COVID-19 has changed the way people invest.

The virus’s relentless onset and the consequences it wrought on the financial markets were stunning. “This happened overnight,” marveled Sylvia Jablonski, CIO of Defiance ETFs.

For those fortunate enough to stay in the stock market after it tanked a year ago, the pandemic has produced an incredible bounty—premised on the hope of deliverance from the scourge via vaccines. Along the way, though, market trends shifted, with growth names losing some of their oomph and value ones ascendant. Further rocking the financial realm was an onslaught of newbie online stock pickers, a yearning for sustainable investing, a rise in cryptocurrency, and an incipient move toward higher interest rates.

The big question going forward is whether asset allocators will move out on the risk curve as the economy improves. Of course, some will want to be comfortable and safe. Many pension funds are even more committed to de-risking now, as they whittle their stock holdings.

Don’t expect any hikes in international investments, at least in the short term. Institutional investors, said Sean Bill, CIO of Santa Clara Valley Transportation Authority (VTA) in California, prefer the US, especially for stocks, thanks to this country’s adherence to the rule of law, plus its penchant for innovation, and its general stability. “When you’re looking to park your capital, the US is the least dirty shirt in the hamper,” he said.

Here’s how the investing environment has changed since last March:

The resurrected bull market has new leaders. By all accounts, the bounce back from last March’s swoon has been heady. The S&P 500 lost a sickening 30% over just three weeks back then. But Washington came to the rescue, with near-zero short-term rates from the Federal Reserve, billions in Fed bond buying, and enormous aid packages from Congress and the Trump administration. There’s also the imminence of a fresh $1.9 billion plan from the Biden White House, a package now before lawmakers.

The S&P 500 ended up ahead with a total return of 18.4% in stricken 2020. From the depths of last spring, the index has vaulted 70%, smashing all records. Many investors are boosting their equity holdings as swelling confidence in the recovery overshadows worries about a stock bubble that may burst. And that likelihood has scrambled the board, reordering who is leading the advance.

By Bloomberg’s estimate, the past year has marked the strongest start to a bull market since the 1930s. Investors poured $36 billion into stock funds two weeks ago, the most in more than two decades, by EPFR’s count.

Information technology (IT) remains the top of this pack over the last year, although its recent performance has flagged. The FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon, and Google parent Alphabet) mostly leveled off in the fall after their spectacular runs, and some are down a bit over the past month.

Meanwhile, value stocks have had a fine time, for a change. Over the past six months, the Russell 3000 value index has outpaced its growth counterpart, 20.6% to 7.9%. That’s quite a switch, as growth has been in the lead for the past decade.

Reasons range from a recovery in oil prices (buoying long-suffering energy companies, such as Exxon Mobil) and expectations of rising interest rates, which spell a more rapidly expanding economy—a condition that’s  friendly to value stocks, which tend to be in cyclical industries.

The Robinhood Effect kicks in. Hot money has a new definition: amateur traders, mostly 20-somethings, who use the popular Robinhood online trading platform and others like it to ride momentum stocks, or “stonks” in their parlance. Bored homebound investing tyros downloaded the Robinhood app or its ilk to partake of the market’s thrills.

Doing this amid the post-March bull market stoked their attitude that they couldn’t lose. By year-end 2020, the platform had amassed 20 million customers.

The appeal for the young users is Robinhood’s free trades and easy-to-use trading program, ideal for mobile devices. Part of the experience, not to mention the fun, is communicating with kindred spirits on social networks like Reddit.

This allows amateurs to react en masse to the latest fad, such as the recent jump of ailing retailer GameStop, a buying frenzy that slammed hedge funds shorting the shares. GameStop and other meme stocks, like those of theater chain AMC and apparel seller Express, benefited outrageously, as did cannabis equities and silver exchange-traded funds (ETFs).

Certainly, some Robinhood users got hurt themselves. GameStop, for instance, surged this year to $396 by late January, up from $12 last fall, and since has slid to just over $100. People who bought high are not happy. Also, the online brokerage angered its customers when, under pressure from its clearinghouse to post up to $3 billion in cash to cover it if stock prices cratered, Robinhood imposed curbs on trading GameStop and others.

At a scorching congressional hearing, lawmakers grilled the company’s CEO. Numerous investigations and lawsuits were launched. Warren Buffet’s sidekick, Berkshire Hathaway Vice Chairman Charlie Munger, denounced Robinhood, saying, “I hate this luring of people into engaging in speculative orgies.”

But will the Robinhood Effect fade away? Not likely, say numerous observers. Thanks to the pandemic, there has been an explosion in individual investors lately, amid enormous trading volume. Some 10% of Americans bought stock for the first time over the past 12 months. Robinhood itself is well-capitalized and has no trouble raising money.

And, to Defiance’s Jablonski, they have wants that this lickety-split, free platform can satisfy and the rebellious camaraderie that comes with it. “Generation Y and Z want disrupters, like Tesla, 5G, machine learning.” They’ll get those via apps like Robinhood.

Sustainable investing gets bigger. The pandemic has been an accelerant for environmental, social, and governance (ESG) investments. A JPMorgan poll of 50 institutional investors globally last year found that 70% of them believed COVID-19 had prompted awareness of climate change—and has spurred ESG investing. What’s more, 55% of them thought the coronavirus would have a positive impact on ESG investing over the next three years.

And investments in sustainable products have stepped up. In 2020, investment flows into ESG mutual funds and ETFs exploded, more than doubling from the year before to $256 billion, by the reckoning of LPL Financial. The asset manager’s study countered the old objection to ESG investing, that it lagged behind the market: Two-thirds of sustainable funds outperformed peers in 2020.

BlackRock, the world’s largest asset manager, this winter upped its insistence that companies be more climate-minded. CEO Larry Fink challenged them to meet the goal of zero greenhouse gas emissions by 2050. And 2020 was “a pivotal year” that awakened investors to the need for ESG investing, he said in January during a virtual appearance at the World Economic Forum. In fact, he added, last year BlackRock voted against 69 companies and against 64 directors for climate-related reasons, and it placed 191 companies “on watch.”

Bitcoin becomes a thing. Once a pariah, now, for some, it’s like a gift from the messiah. Bitcoin, created by a revered, if shadowy and perhaps fictional, figure known as Satoshi Nakamoto, has had a remarkable climb of late.  

Bitcoin’s popularity has quieted a lot—albeit hardly all—of the suspicion surrounding the digital denomination. You hear less nowadays about its uses for illicit stuff such as drug deals and terrorism. The virtual currency topped $57,000 in late February, almost doubling in value in two months. The volatile asset has dipped since, to a still-high $48,757.

Fidelity Investments study found that 27% of institutional investors were in Bitcoin and other crypto denominations last year, up from 22% in 2019. JPMorgan, the nation’s largest bank by assets, now processes Bitcoin transactions on the lender’s platforms. The Chicago Mercantile Exchange last year started trading in Bitcoin futures contracts. PayPal and Square began buying and selling cryptocurrencies. Amazon and Starbucks have recently allowed payments in Bitcoin.

Another plus for Bitcoin is that it has a very small correlation to stocks, not to mention other asset classes. That lack of correlation, its fans say, bolsters the argument for including it in a diversified portfolio. According to a VanEck study, Bitcoin’s correlation to the S&P 500 is a low 0.15 (1.0 is a perfect match).

As investors grow “increasingly concerned over the debasement of their currency,” VTA’s Bill stated, “I expect Bitcoin will continue its steady march forward as the digital alternative for gold.”

While the pension plan he oversees has not put money directly into Bitcoin, the VTA portfolio has a small position in it via Skybridge Capital. Bill said he expects institutions to invest more in the virtual currency over time “to improve their risk-adjusted returns.”

Long-term rates nudge up. Last week, the bond market went on a wild ride, and the 10-year Treasury’s yield rose to 1.46%. This marks the latest twist in the unwinding of the great bond rally, which began in the early 1980s—when interest rates started their long Federal Reserve-engineered descent from the high teens, a fall that levitated prices. Now, the Fed has pledged to keep short-term rates low to combat the pandemic-provoked recession.  

But with ample Washington aid in the system and more coming, plus widening vaccine inoculations, fixed-income investors are eyeing the prospect of a healthy economic recovery this year, along with somewhat higher inflation. Hence, the increase in the benchmark 10-year note’s yield.

None of these factors spells a tidal change: The so-called “breakeven rate” from Treasury inflation-protected securities (TIPS) shows the market thinks inflation will only be 2.14% over the next decade, a percentage point higher than now. “That doesn’t seem very high,” said Wes Crill, head of investment strategists at Dimensional Fund Advisors (DFA).

Forecasts for the 10-year Treasury range up to 2.5% by year-end. That’s hardly eye-popping. In 2007, the year before the financial crisis, when the economy was still robust, the 10-year had a 5% yield. Since then, it has ranged as high as 3%.

But assuming the economy is on a growth trajectory that will last, overall interest rates, including short-term ones, may be headed north in the near future. Fed Chair Jerome Powell has pledged to keep the short rates low until the economy is back, and he contends he is in no hurry the change monetary policy. Recall, however, that Powell has shown a tendency to reverse himself. He was busily boosting short rates until 2018, then went the other way.

To be sure, the developments of the past 12 months indicate that surprises can leap out at you. As the pandemic began, many investors cashed out of stocks and stuck the proceeds into money market funds, paying next to nothing. Then the stock market took off and they weren’t part of the bonanza. “That,” DFA’s Crill said dryly, “was very bad timing.”


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