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“AVOID PANIC”

by Contributor

Image: geralt, Pixabay, License

(Aug. 12, 2020) — The COVID-19 pandemic has altered everything regarding the global economy — and the stock market is sadly no exception. The biggest rumbles began in May when the renowned Warren Buffet famously decided to part with his complete portfolio of airline stocks in the United States. He decided to cut his losses and simply said that the global landscape has changed — and he was entirely right.

In the period before the pandemic, the world’s airlines were booming. On average, the number of air passengers had steadily been rising by no less than 5% for more than a decade. However, the coronavirus changed all of that overnight.

Interestingly enough, plenty of senior analysts disagree with Buffett’s decisions. As it turns out, plenty of governments have decided to help their national airlines and not let them fail. Historically, airline stocks would quickly bounce back after even the most disastrous economic crises; the more optimistic analysts wagered that the same would happen here.

It’s not yet clear which school of thought is correct and what the global stock market will look like from now on. Investing in bonds and stocks will mean taking plenty of factors into account — some of which are not yet clear. The biggest problem regarding the future of the stock market after COVID-19 is that guesswork is now a far more significant part of the game than before. In the modern era of trading, no-one has had to handle an issue like a global pandemic.

Shaky Recovery

Obviously, no-one in their right minds would be happy if their portfolios had a lot of travel, hospitality, and airline stocks at this point. Speaking to chief investment officers of various trading groups, we’ve come to the conclusion that the retail sector seems to be particularly vulnerable.

The hospitality and travel sectors have definitely been hit, but they had been in rude health before the pandemic. On the other hand, the retail industry has been in a structural decline due to the exponential growth of online trade. A coronavirus vaccine may not necessarily mean recovery for the world of retail.

And that’s the biggest question that most stock traders are posing right now — when will a vaccine appear, and how much normality will it manage to restore? It seems logical that stock trading, in general, will become slightly less confident even when the pandemic is resolved, simply due to the fact that we now know how a random global health crisis can completely unravel the world’s economy in mere weeks.

The world’s aggregate demand is woefully low right now, and the ability of governments to enact radical fiscal and monetary policies has been pretty much maxed out. That’s why consumer confidence will have a long and winding road back to pre-COVID-19 levels. And the value of the majority of the world’s stocks is bound to reflect such changes.

COVID-19 Disruptions

Considering all of the above, and regardless of the rate of global recovery in both economic and health terms — most experts actually agree that the landscape of worldwide trade will settle on a new normal. The investment strategies implemented by various traders will have to consider more than the pure bottom line — the reality of business has simply changed for good.

Many believe that certain consumer habits that have drastically changed during the pandemic won’t go back for good. Some are bound to carry over even when the crisis is over. The rise of e-commerce due to social distancing isn’t likely to go down once the pandemic is resolved; after all, it’s just the most efficient way to purchase something, both in terms of cost-effectiveness and effort. People simply needed a good enough reason to change their habits — and the pandemic has changed all of that.

That’s an incredibly important point. The way business strategies are structured is bound to change with the expectation of a future pandemic; businesses will probably try to be less lean and more resilient. If the current crisis has shown one thing, it’s that cost-cutting doesn’t directly translate to increasing returns — this has been the kind of force majeure event that everyone knew could happen, but no-one honestly expected.

Everything that we’ve said up until now is based on the assumption that a vaccine will be found in the near future. But that might not happen, even though plenty of laboratories are working on it as we speak. If we simply adapt to a world with COVID-19, the travel and leisure industries will have to find new ways to cope with diminishing returns.

Long-Term Outlook

All of these sentiments will influence the investment strategies after all social distancing norms are left behind. If we collectively surmise that the certainties we once held are no longer valid, budding investors will be forced to base their strategies on brand new financial narratives.

Whatever happens, company cultures will have been changed for good. Even large corporations will undoubtedly try to be more agile than ever before. On the other hand, investors will be far more open to investing in companies whose primary values are easy adaptation and responsiveness.

Of course, debt levels will continue to be necessary. And the uncharted seas of post-coronavirus trading only starts there. Canny traders have frequently managed to extract value from panic-induced bear markets — but this particular crisis has made such efforts far more complicated and less lucrative.

For all kinds of investors and investment strategies, the most important rule has always been — avoid panic.

And that’s one of the rare things that won’t change due to the COVID-19 pandemic. Instead, investors will still try to stay their planned course even with market fluctuations — which is achievable with a reasonable degree of portfolio diversification. We hope that this brief guide was useful to you, that you’ve learned something new, and feel more confident about your future trading decisions. Of course, make sure you are staying safe in these times we’re going through and have a good one, guys!

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