What could have been.
I was salivating when the market took a huge lurch downwards towards in the second half of March. It appeared as though one of those once in a lifetime buying opportunities was coming. As someone who is still in their asset accumulation phase of their lifecycle, this appeared to be a huge gift the market was giving. After several years of inflated market valuations, finally a huge buying opportunity was coming.
But alas, it did not last. The market has shot upwards as quickly as it went down. Sure the market is still well below all time highs reached earlier this year, but the move upwards in no way correlates to the real world economy. Governments and central banks have pumped money into the system at record levels ensuring asset prices remain high. And with interest rates at historic lows of close to 0%, stocks seem to be the only game in town.
I came across a post by intrinsic investing the other day which gives another explanation as to why markets have recovered so quickly. Here is an extract of that article:
“The most important thing to keep in mind is that S&P 500 is often referred to as “the market,” but of course the S&P 500 is essentially the 500 largest companies in the US, which, especially during this crisis, are not indicative of the economy as a whole. And the largest 25 companies make up nearly 40% of the S&P 500. Here is a list of those companies:
Apple, Microsoft, Google, Facebook, Berkshire Hathaway, AT&T, Johnson & Johnson, Intel, Verizon, JP Morgan, Amazon, United Health, Pfizer, Bristol Myers, Merck, AbbVie, Bank of America, Proctor & Gamble, Cisco, Comcast, Visa, Home Depot, IBM, CVS, Amgen.
Now whatever you think about those companies, most all investors would agree that they are far, far more likely to survive this crisis than the average company. And, in fact, with so many smaller companies struggling it seems very likely that many of these large companies will thrive in a post-Coronavirus world in which their competition has been dealt a huge setback.
So looked at this way, the fact that the S&P 500 is only down 16% from its highs does not suggest that the market thinks the economy will be OK, but rather that the largest companies in the world will see their way though, and as demand returns they will face much less competition.”
This explanation from intrinsic investing makes a lot of sense. In recessions and downturns, liquidity dries up meaning there is no easy money any more. Startups and small companies which would normally disrupt mega corporations are starved of cash to grow. Those that have net yet reached positive free cash flow fade away. Recessions ensure the strong get stronger and the weak die. It is corporate survival of the fittest at its finest. It is no wonder small cap stocks have not snapped back as quickly as their large cap peers.
The way the markets have reacted by shooting straight up is contrary to what most people would have predicted. Many would have looked at the bleak economic figures which were only getting worse by the day and thought markets had to fall further. But it is important to note the market is not the economy. How markets react on a short term basis is anyones guess. And manipulations by giant bodies such as the Fed makes any market timing efforts a fool game. That is why I have a monthly stock market purchase programme where I buy stocks ever month regardless of what the market is doing. If I didn’t have this programme, I would be still waiting for stocks to fall further. I would be kicking myself for not having bought stocks at their lows.
Looking to the stock purchases I made during April, it was a mixed bag. I bought a number of defensives whose stable cash flows should hold up well during any upcoming recession. The stability of cashflow will be an invaluable resource especially if and when liquidity begins to dry up.
I also bought more cyclical stocks such as BP and Informa who’s business have seen product demand crater due to the ongoing crises. The idea behind these stocks is them being the best in breed at what they do, BP in energy and Informa in exhibitions. I believe, due to the current lockdowns and declining economic growth figures, there will be numerous bankruptcies in the oil space. It will also be a while till any demand for exhibitions pick up again. Thus, it is important at this to pick companies that will survive. I believe companies like BP and Informa will not only survive but prosper as going forward they will live in a world with reduced competition. Getting into these stocks now ensures an attractive price on a long term basis.
These are the stocks I bought during April using my monthly stock purchase programme :
- Associated British Foods – Purchased 9 shares at £19.02 each
- AG Barr – Purchased 38 shares at £4.98 each
- BP – Purchases 107 shares at £3.21 each
- BT – Purchased 121 shares at £1.21 each
- Informa – Purchased 35 shares at £4.37 each
- Fundsmith Emerging Equities Trust – Purchased 17 shares at £9.65 each
- Vodafone – Purchased 138 shares at £1.12 each
In total, the purchase of these 7 shares have added £74 in dividend income to my portfolio.
Looking at my portfolio as a whole, it now generates £4,162 in annual dividend income.
Going forward, I am not too sure what is going to happen. How long will the lock down last? Will there be a second, third or even fourth wave of the virus?When will there be a vaccine? How long will it take businesses to get back up and running once the lockdowns end? These are questions no one knows the answer to. And because of these uncertainties, I fear the markets will be much more volatile going forward then they have been over the past two or three weeks.