The new COVID-19 variant Omicron is once again causing disgruntlement on the S&P 500 and stock markets. But it seems that the big players in the economy have largely adjusted to the pandemic. Business is booming everywhere. Despite a small dip in the third quarter, earnings per share and aggregate revenues for S&P 500 companies are still historically high (see above image). The labor market situation has also improved greatly in the U.S. and Europe from the COVID-19 crash in March 2020. Consumers are spending more money than ever this holiday season in the United States. They’re braving the pandemic with “revenge shopping“.
The Fed is trapped
In the U.S., Fed chief Powell is now thinking more clearly than ever about an interest rate turnaround. Powell had explained in the context of a public Senate hearing that the Fed could start the tapering sooner than previously assumed, despite Omicron gaining momentum. Thus, the bond-buying program of $120 billion a month could end as early as March, after which an interest rate hike could be considered.
The Fed is definitely trapped because the high inflation rates are putting Powell under pressure. Conversely, an interest rate turnaround could lead to nasty upheavals on the stock markets. Historically, interest rate hikes have, at some point, always led to stock market crashes and recessions in the medium term. Investors will surely consider whether they still want to buy companies with profit multiples of 50 or even 80 and more when they can get a safe yield via long-term government bonds.
European Central Bank is hesitant
The European Central Bank is more hesitant and still considers the high inflation to be temporary. Accordingly, the ECB will wait with tapering and has already ruled out interest rate hikes for 2022. Christine Lagarde from the European Central Bank confirmed nonetheless, that she would take swift action to combat increased inflation should it become necessary. It’s indeed a tough situation and with the Omicron variant, there is now another factor that central bankers have to consider. The future will show which central bank was right in the end.
I don’t care about Omicron and its impact on stock markets
But all this should be of less interest to us private investors. Those who have done their homework have a broadly diversified portfolio with a nice dividend cash flow.
Or they have invested in a broadly diversified ETF. Time will take care of most things here. Because as with all things, time is the best tool to filter out the best and most antifragile. Companies that are fragile will fail over time and what remains are strong companies that give your portfolio the boost it needs.
Fragile, in my view, are also those investors who chase every hype and don’t care about fundamental valuations. They often forget that a company that does not generate a profit theoretically has no value. It may have some assets but it doesn’t put food on the table for investors. A business model that burns cash and does not generate positive cash flow is highly antifragile.
I stay away from such companies as much as possible. Only from time to time do I gamble and buy companies like Palantir or Mynaric. But the focus for me remains solid companies with a solid market position, reasonable valuation, and juicy dividends.
At all, do not trust any analysts
I get questions every now and then when individual investments don’t run well. TeamViewer is an example. It seems like investors buy stocks just because they read something interesting about it. Then they are afraid to miss something. It is the usual FOMO.
However, no investor should invest without doing his or her own due diligence. In general, I don’t invest money in a company if I’m not prepared for the share to lose 50 or 60 percent of its value. That is part of it. Incidentally, such shares can also rise again. I have seen it happen many times. Dialog Semiconductor, Hugo Boss, Tanger Factory are just a few examples. Companies like Tesla, Apple, and Amazon have also experienced nasty times. Volatility is part of it. Those who can withstand the risk will be rewarded with opportunities.
In general, investors should not follow or trust analysts. Analysts pursue different interests than investors (agency problem). They look at their career and not at the asset management of the investors. Many blogger colleagues refer to TipRanks and their ranking there. I would not trust this kind of reference. I am ranked quite high there but the system works rather poorly. For example, it takes neutral ratings as sell ratings. What’s the point with that? I’d rather trust my own dd than another analyst’s ranking on TipRanks.
Speaking of analysts, Goldman Sachs still recommended Enron as a buy two months before the stock imploded (link). Captain hindsight says: absurd!
I sit firmly in the saddle
Good rides come to those who sit tight. With a strategy and proper risk management, you can ride well through the current wild times. By risk management, however, I don’t just mean stocks, but life in general. Good education, a healthy diet, tolerance of other opinions, and enough distance from the constant noise of everyday information.
In addition, it helps to be optimistic. Those who always see only the bad and wait for the crash live in constant worry and fear. I try to minimize the causes of worry and fear by taking various measures. Financially, I balance the risks of my active income by building a passive income. My passive income is in turn secured by my active income and my human value on the labor market.
Do not forget serendipity
Besides antifragility, serendipity is another aspect around which I build my life. Serendipity is the happy coincidence that in the end is not as happy and coincidental as it seems. It’s much more about building a door of opportunity into life. The easiest way is to say “yes” more than “no” and to have a valid reason for every “no”.
Especially at the end of the year, many people set themselves a lot of concrete goals again. Why not simply make it your goal to say yes more than no in the coming year? Saying “no” is the first reflex of our fast thinking which looks for the most comfortable way and does not want to leave the comfort zone. It is necessary to counteract this quick thinking “no” with a hearty “yes”. But of course, the simplest heuristics apply here as well. There are no shortcuts so getting rich quick is not possible. There is no free lunch in the world and risk takes precedence over opportunity.