The horror and cruel events happening in the world right now make the stock market to an exciting place. There have always been times in which some industries or sectors performed much better or worse than others, but this pattern seems to accelerate.
Cheap Money and Low Interest Rates
Since the years of cheap money started, all those strong growing companies that finance their growth with cheap debt had a fantastic run. As we are in the age of digitalization, most of them came from the Internet sector, often providing mainly digital products and services. All other companies, large, profitable organizations did not perform bad, but neither performed as good as those growth stocks. As a result, those companies, often paying good dividends, underperformed the market.
When the global pandemic hit the markets in 2020, all shares dropped sharply. However, within a few days only, clear patterns could be identified:
- The “looser” group. They come from industries, which were hit the hardest and whose revenues sustainably dropped due to the lockdown, social distancing, and limited travels. Those were sectors, such as aviation, hotels, bars, restaurants, clubs, cruise ships etc. Those companies take the longest time to recover and are still in that process.
- The “average” group. Those are the companies that could somehow adapt to the “new normal” and changed to providing services contactless, online, or in other creative ways. Their share prices developed quite well, as did the overall stock market.
- The “outperformer” group. This group included companies that received an extra growth from the pandemic. Most of them came from the online business, especially enabling other companies to grow their online presence (e.g., e-commerce platform or cloud computing providers) or just benefitted from people doing more online and more at home. This group also includes companies providing vaccines, masks, desinfections etc. However, as masks and desinfections are typically not the only product of a company and only make a small amount of their total revenue (e.g., 3M), the impact in those cases was limited.
Supply Chain Crisis
The next event that had a tremendous impact on markets were the supply chain issues that also resulted from Corona. In consequence, transportation companies and raw material producers could multiply their prices and with it their profits skyrocketed. This had a greatly positive impact on industries such as cargo transportation (especially shipping), semiconductors, and mining.
If one company rises its prices, its good for the company. If everyone rises its prices, its inflation. Resulting from the disturbed supply chains and the cheap money on the market, inflation rose. Central banks are now starting counter-measures by increasing interest rates again. This will result in debt becoming more expensive for companies. As growth companies finance their growth with debt, it will directly impact them. The result is what we have seen Mid November 2021 until January / February 2022. A whole market of “fantastic growth shares” completely crashed by 30%, 50%, 60%, or 80%. (Consider Adobe or MongoDB) This crash has little to do with their operational performance. It is simply because of the expected more expensive financing that they will have to face in the future (and sometimes because Corona looses its impact).
A lot of money went out of that sector within a short time period. So the question is: Where does it go next? The answer mainly seems to be large, profitable, dividend-paying companies that underperformed the market in the past decade. Especially dividend aristocrats and companies with very high-yield dividends (e.g., >6%) seem to benefit now.
Sidenote: Gold, Cryptocurrencies, and the MSCI World
Gold benefitted as well. Cryptocurrencies did not: Instead of being correlated to gold (or inflation rates), they turned out to be very much related to the broader tech companies market. The MSCI World, which is seen as absolute basic investment in many portfolios, also decreased, as the major tech companies grew so strong that the capitalization-based logic of the ETF overweighted them in the past. As they fall, this also has a stronger effect on the overall ETF.
Russian – Ukrainian War
When people thought, this is how it will be the next months, Russia attacked Ukraine. This triggered a new set of market developments:
- Russian stocks completely crash. Currently, they cannot even be traded anymore and the stock exchange in Moskau is closed.
- The weapon industry is strongly growing. Countries around the world (but especially in Europe and especially Germany) de-prioritized investments in that sector in the past, hoping that there won´t be any major war or military threat in close proximity in the next decades. This suddenly changed.
- Russia is extremely important for exporting energy resources (oil, gas). As this huge dependency is a major threat to the rest of Europe, governments are very likely to mitigate it as soon as possible. This could be done by receiving oil and gas from somewhere else or by investing into renewable energies that can be produced directly in the own country. Hence, stock prices of renewable energy companies are rising again.
- Russia is strong in terms of Cyber security and Cyber attacks. With more incidents happeing lately, it is also likely that cyber security companies will soon get some major commissions to strenghten the capabilities of companies and governments in that sector.
What to Learn from the Past Stock Market Developments
Looking at all those events from today´s perspective, I have two observations:
- None of the above events came completely surprising. Especially, their impact on the stock market could have been quite foreseeable.
- Most of the effects on the stock market had a very sudden start and a very abrupt end. However, even if the first 50-60% of the impact on a stock happened immediately, it would have almost always been beneficial to jump onto the running train a bit later on.
Take-Aways for Future Better Investing
From the two observations, I have three take-aways for myself:
- Anticipating future market trends is not impossible. If you bet on the right stocks at the right time, profits of well over 100% are possible. You might not be right every time, but perhaps every third or fourth time. And opportunities in terms of market fluctuation is increasing.
- The academically perfect market, which says that all information are part of market prices in the moment they become public, does not exist. I think this is because of the increased number of private investors that simply “run behind”. As a result, investing because of newly published information can sometimes still be beneficial.
- Changes can still occur any time and will have an immediate effect. Therefore, whatever you do, be prepared to have a stock drop heavily. If you are not conviced of its business model and its fundamentals, do not invest. However, if you are convinced, trying to anticipate future trends and the right market time might be an extra profit booster.