Top 5 thoughts on the Covid stock market

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I know, I know.  I periodically test your patience by taking extended leaves from writing the blog.  I’ll use the excuse that everyone seems to be using right now: “Blame it on Covid.”  After almost two years of having to homeschool the cubs due to school shutdowns, I think I’m finally in the clear.

It has been a pretty wild year or so with so many things to talk about.  I’ll get to them in due course, but I wanted to cover what I think are the five most interesting/surprising/paradigm shifting thoughts that have emerged lately.

Here goes:

5.  US stocks are still the place to be.  Long time readers know each year I think about which stocks will do better, US or international.  Going back to 2013, US stocks have out performed international stocks.  Every year I think that this might be the year that international stocks turn the table and every year I’m wrong; US stocks come out on top.

A ton of people have written reams on this issue (me included), and there are a ton of complexities that I won’t attempt to cover here. 

But just looking at the numbers, US stocks have GREATLY outpaced the international stocks again.  In 2020, in the teeth of the corona virus and it’s impact on markets, US stocks were about 10% higher than international.  In 2021so far, it’s a similar story with US stocks about 12% higher.

This is certainly a curious phenomenon, and the stock market more than probably anything else forces reversion to the mean.  So we should expect international stocks to do better, but it certainly hasn’t happened yet.

4.  Covid gave us the greatest V recovery of all time.  Back in March of 2020, it was a crazy time for the stock market.  Things were in freefall, and we were comparing that market slide to some of the worst ever—the dot-com bust, the Great Recession, and the grandaddy of them all The Great Depression.

In the space of about 30 days, the stock market plummeted over 30%.  That’s crazy and steeper and faster than the Great Depression or the Great Recession.  At the time it was easy to think things could really go to hell.  Even the most optimistic (me included) thought we’d be in for a long recovery.

Yet, stocks completely recovered about four months later.  As crazy fast as the fall was, that recovery was even crazier and faster—totally without precedent.  Bear in mind, it took 25 years for stocks to recover after the Great Depression.  For the Great Recession it was five years.  This was four months.  Wow.

3. Politics don’t matter in finance as much as we think.  Last November Americans voted out President Donald Trump and elected President Joe Biden.  Obviously they are very different men with very different policies.

Yet, for all of that, and I’m really going to sound like a bitter old fox here (and maybe I am), has the country really changed all that much between the two administrations?  More to the point of this blog, has the stock market?  In the four years starting when Trump was elected the US stock market increased about 15% per year.  In the year since Biden got elected it’s increased about 35%.

Those are pretty heady numbers that speak to the fact that the US economy and publicly traded corporations are incredibly durable, despite what is happening in Washington.  A few years back I wrote a post to this very point; the stock market does great no matter who is in power and this is just the latest example.

2. Inflation.  This is probably the biggest unknown right now for the stock market.  Starting in April inflation crept up to about 5-6% and has been hovering there since.  This is a huge change from what has been a really long streak of exceptionally tame inflation.  Before this year, the highest inflation has been this millenium was back in 2008 when it hit 3.8%.  Now it’s over 2% more than that, and that’s a lot.  In fact, you have to go all the way back to 1982 to find a time when inflation was this high.

That’s all well and good, but what’s the “so what”?  All the official people are saying the inflation is temporary and it’s just a matter of the supply chain disruption kinks working their way out of the system like a snake eating a pig or something.  Of course, you’d expect President Biden and Jerome Powell and Janet Yellen to say that.  That sounds much better than: “Wow, we really screwed up and inflation is going to spiral out of control, so get ready for bad economic times like in the 1970s.”

We’ll see how this plays out.  If it’s temporary, then it won’t be a big deal.  However, if 5-6% becomes the new normal, that has HUGE implications on our personal finances.  We’ll see over the next several months.

1.  Innovation just keeps on trucking.  We know the stock market has done well, really well, through the corona virus.  There are a lot of things we can point to like government spending and such.  But I think it’s mostly just the meat and potatoes of the stock market—strong earnings driven by amazing innovation.

At the beginning of the pandemic, I mentioned five areas that I thought would really benefit from the changes.  Some of those were right and others not.  But the constant was that our incredible economy is thriving and innovating.

Just yesterday, Tesla stock rose to become the fifth company worth over a trillion dollars.  And that’s just driven by amazing innovation.  Same story with Apple and Amazon and a million others.  If you’re a stock owner, that’s made you rich.  If you’re a human, that’s made your life better.  We’re living in awesome times.

I hope you enjoyed this.  Did I get the list right?  Is there anything you think I missed?

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