- Close to 800,000 people have created new brokerage accounts on three of America’s top brokerage platforms since the coronavirus pandemic hit the US.
- That means tons of new people are playing the markets at a time when things are so uncertain that hundreds of companies canceled their 2020 earnings guidance. There is no model that can predict what’s about to happen to the economy or the market.
- That means tons of new people desperate for a coronavirus vaccine are now betting on potential treatments and cures. Just this week the market handed billions to two companies that made headlines without showing any real data.
- This is very stupid, and people are going to get played.
- Visit Business Insider’s homepage for more stories.
There are a lot of words people who watch the markets use to describe their condition. Sometimes it’s choppy; other times it’s swooning. Right now the condition of the market is stupid.
A perfect storm of events has created this condition of stupidity, and each event contributes in its own special way. They are all related, of course, to the most important thing in our world at the moment: the coronavirus pandemic.
Thanks to the coronavirus, millions of Americans are bored at home, some without a job. And as a result, according to the Financial Times, 780,000 of these bored people have created accounts with the three of the four largest brokerages in the US: Charles Schwab, E-Trade, and Interactive Brokers.
This herd of newbies has charged into the market at a time of incredible uncertainty. Hundreds of companies in the S&P 1500 have withdrawn their revenue guidance for 2020, leaving these new investors with little to go on in the way of forward-looking statements.
We know the second quarter will look much, much uglier than the first, but anyone who thinks they know how ugly is trying to call the score of a game before it’s over and after the rules have completely changed.
You will not find a genius on Wall Street, in the Federal Reserve, or at NASA who can call what is about to happen in the stock market. So no matter how smart your friend with the new trading account thinks they are, tell them (gently) that they cannot call it either.
Trading is hard, anyone will tell you, and it is in large part a mind game. To get it right, you have to understand your emotions and your biases. This is why there is a whole cottage industry of psychiatrist trading coaches.
At this moment, almost every human being has an innate bias toward finding a coronavirus vaccine or treatment. The market is reflecting the depth of emotion behind that bias in its wild fluctuations whenever there is even the slightest news about a vaccine breakthrough.
Over the past few days we’ve seen two companies make headlines without even remotely having the data to back it up. The most impactful ones were about Moderna, which said on Monday morning that patients in a trial of its vaccine candidate had positive immune responses.
The market lost its mind on that news. The company’s stock jumped 26%. Moderna’s CEO, Stephane Bancel, did a victory-lap interview for a credulous Joe Kernen on CNBC. Literally overnight the company raised $1.4 billion. The whole market rallied. It was a true Cinderella story.
It took a full 24 hours before the market actually read the results from Moderna’s clinical trial, which cited coronavirus antibodies forming in only eight patients. The market also noticed that the National Institute for Allergy and Infectious Diseases, which was partnering with the company, did not release an endorsement of its findings as it usually does.
Once the market digested all of that, Moderna’s stock fell over 10%, and the market went with it. No one did their homework, and no one has since apologized. Welcome to Wall Street. The market didn’t learn its lesson either. On Wednesday, Inovio Pharmaceuticals announced that its COVID-19 vaccine candidate had produced positive results in animals and that it expected data in the coming weeks. The stock jumped over 8%.
The pharmaceutical industry was already opaque and scammy. Now suddenly everyone in the stock market is invested in a specific outcome from the sector. They want to be the person who scores big on a lifesaving treatment. In fact, they’ll be afraid to miss out on opportunities. I have an extremely active subconscious, and I could not have dreamt of a more perfect condition for separating investors from their money if I tried.
Making bottles and models
Wall Street, of course, is beside itself trying to grasp on to something through this uncertainty. It is already a culture where original thinking can be frowned upon (it might upset your boss or your client), where every assumption is based on an old model, and where everyone is cribbing each other’s work.
There is no model for the economic reopening from the coronavirus pandemic, and the closest possible model we have — China — is flawed. And it’s flawed not only because the numbers China has provided the world about its coronavirus experience are extremely dubious, but because the US is simply not going to get off the mat as China did. Our economies are too different.
Some of Wall Street understands this, and some of it doesn’t. In the column of people who get it you may place Robin Xing, Morgan Stanley’s chief China economist, and Andrew Sheets, its chief cross-asset strategist.
In a short podcast for investors, Xing explained what China watchers already know: China’s economic rebound has been led by manufacturing and industrial sectors. The country’s service sector, especially when it comes to transportation and leisure, is still pretty dormant. Consumption is low, as the economic deep freeze of strict lockdowns hit households and small and midsize businesses (much of China’s private sector) the hardest.
That is bad news for the US. Most of our economy is made up of small and midsize businesses in the service sector. Consumption is what we do. Manufacturing makes up such a small part of this picture that last year was the worst year for the sector since the financial crisis and the US economy hummed right along, shrugging it off.
Manufacturing will not lead America out of this economic malaise; it simply isn’t big enough. The coronavirus pandemic has hit our economy exactly where it counts: in services. The China model isn’t going to work here.
In sum, what we have in the market is an unholy mess. We have bored, unseasoned, emotionally conflicted investors playing around in a murky pool where one of the most opaque sectors has the ability to make the biggest waves. It’s very stupid — people are going to drown.
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