COVID waves offering opportunities for investors

After a sizable pullback last Thursday on the back of COVID-19 resurgence concerns global financial markets had one of its lowest performing weeks since markets bottomed out the week of March 23rd. 

Looking at the US’ S&P 500 the index was -4.78% last week and -5.86% year to date. In comparison Asian markets performed better with the Hang Seng and CSI 300 Index -1.89% and +0.05% respectively last week but saw a stronger pullback on Monday of this week. The US’ ‘fear gauge’ VIX Index shot up to levels of 36.09 last week from 24.52 (the week before) representing a spike of +47.19%.

 AQUMON’s diversified ETF portfolios were +0.13% (defensive) to -3.49% (aggressive) last week and +1.47% (defensive) to -5.98% (aggressive) year to date. Last week we saw a selloff for all risk assets particularly in US small caps (-7.08%) and energy stocks (-11.20%). Safer assets such as gold was +3.07% last week.

This week our focus will be looking at the US' COVID-19 situation, looking closer at what is driving markets beyond retail investors and learning historically how markets have responded after a larger sized pullback. 

Fears in 2nd wave of COVID-19 cases reemerging but we need to look deeper 

Even though the reopening of our economy seems relatively smooth here in Hong Kong the US in particular has seen a recent surge in new COVID-19 cases. Currently cases in the US exceed 2,182,950 as of Tuesday and take up 34.6% of the 8,120,087 global cases. Looking deeper into the US trending data we see at least 22 out of the 50 states including key states like California, Texas and Florida all seeing a recent upward trend in new COVID-19 cases. Heavier impacted states like New York, New Jersey, Illinois and Massachusetts (these 4 states alone take up 37.2% of all current US COVID-19 cases) are in turn seeing a downward trend in new cases.  

Investors should understand the recent 2nd wave of cases may be brought on by the relaxation of measures (which each state approached individually) but the position of each state ‘on the curve’ also makes a big difference. Meaning until we start to see more serious resurgence issues with more of the earlier hit states such as New York, New Jersey, Illinois etc. (to be fair California was 1 of the earlier hit states) the COVID-19 impact on the US economy reopening was never going to be uniform but much more varied in waves. 

Logically on a global level we want to remind investors that there will likely be more COVID-19 waves coming given the lack of a vaccine likely until 2021. The key is the size of the impact. So as other investors are giving into their emotions after reading scary COVID-19 headlines we are already anticipating this and calmly approaching our investments in the same manner. 

With markets optimistically pricing in a quicker V-shape economic recovery with our Gross Domestic Product (GDP), employment etc. (this is different from the V-shape rebound we have seen so far in financial markets) subsequent COVID-19 setbacks will cause short selling term pressure along with added volatility in financial markets. We may very well see more of this in the next few months. This may be a good buying opportunity for those of us who missed the earlier rally and continue to believe in long term investing. 

There are multiple factors driving this rally. Not just retail investors. 

It seems too convenient to blame the everyday investor for this dislocated market rally we saw in April into early June. This week we’ve seen too many news headlines describing retail investors as reckless, trying to get rich quick and engaging in speculative trading. What few people talk about is even if retail investors are driving up markets they are only 1 leg out of a delicate 3 legged stool propping up markets. The other 2 legs include optimism on the economic reopening and central bank support. 

This week as we saw markets pullback due to fears from a secondary COVID-19 wave (negatively impacting the US economy reopening) it was the Federal Reserve (Fed) announcing Monday it will begin purchases of individual corporate bonds that gave markets an additional boost and realigned that balance. According to the Fed, individual bond buying will start Tuesday and will "create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds". The announcement comes approximately 1 month after the Fed began buying corporate bond orientated exchange traded funds (ETFs) through the same Secondary Market Corporate Credit (SMCC) program. So far the Fed has bought roughly US$5.5 billion (HK$38.8 billion) in ETF purchases. Investors rejoiced since they continue to see central banks providing an effective backstop towards financial markets. The data is supportive of this sentiment. 

Retail investors when looking at sentiment data continue to be more bullish in nature as showcased by the recent American Association of Individual Investors (AAII) sentiment survey. The survey shows since early May there is a growing number of US investors who are bullish while bearish investors are decreasing. 

When looking at outside research it does seem to suggest that during this recent rally: 1) positioning wise institutional investors were mainly sitting on the sidelines and 2) retail investors seem to have outperformed institutional investors and hedge funds holdings. The net result is if we see short term weakness and added volatility we may see further institutional investors reentering markets even if retail investors get spooked. This is supportive for markets when looking forward. 

What happens when we see larger market pullbacks? 

Last Thursday was the first time since March 18th whereby we saw the S&P 500 pullback over 5% (-5.89% on June 11th). We thought the results of this 65-year study below was quite telling about the power of long term investing. It looks at how the S&P 500 reacted following a 5% or greater daily decline since 1955. It shows that there is a over 60% chance the S&P 500 will rebound in value whether it is 1 day, 1 week, 1 month or 1 year after a 5%+ decline. Clearly there are no guarantees but making time your friend has proved to be effective particularly in times of uncertainty. 

In the current investing world where there are even more unknowns and factors we can not control we highly suggest investors focus on the things they can control such as continually trust that the power of time will help you weather this market volatility and manage your downside risk through 1) accurate diversification 2) improving your investments’ liquidity and 3) controlling how much your invest. As mentioned, if there is further market weakness ahead investors can carefully accumulate at lower cost levels. 

If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON, stay safe outside and happy investing! 

Ken

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

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