As America is the world’s biggest economy, the S&P 500 is an important measure of how well the global economy is performing. So, if you were to land on earth from a different planet, you would be well within your rights to believe that the world’s economy is in a really good position.
How is this possible? Good question…
Tech and healthcare companies make up a large part of the S&P 500 and COVID-19 has been very positive for these sectors. eBay and Amazon are making billions out of our locked-down lives. In July, Jeff Bezos added US$10 billion to his net worth in one day. Also, the hardest-hit industries like hotels, restaurants and airlines make up a slim portion of the S&P 500 index, so their misery is having little effect on its performance. But in our opinion, this isn’t the real reason why the S&P 500 is so high.
For years we have seen the markets not truly reflect the state of the world economy and what we are seeing here is no different. Financial markets work on confidence and the influx of investors money. When they crash, like they did earlier this year, it creates an opportunity for investors to buy stocks at enormous discounts. Imagine walking past your favourite shop and there is a 50% sale on, you’d run in and buy as much as you could afford right? This is precisely what happened to markets this year and we are still riding this wave of confidence. But, as we reach all-time highs again is this where we might see another watershed moment?
Why don’t we just invest in tech and healthcare companies then?
The simple rule of investing is: buy low, sell high. At present, a lot of these companies are at a high. Amazon has seen incredible success this year, which couldn’t have been predicted to this extent. But tech companies are fragile as it is one of the fastest moving spaces in the world. Look back at the 1980s when Sony and Japanese technology ruled the world. Today, Sony and the Japanese economy are now a mere shadow of their former selves. What happens if Jeff Bezos or Elon Musk are struck by lightning tomorrow? We have seen how the loss of an inspirational leader can result in years of failure with companies like Manchester United following the retirement of Sir Alex Ferguson. Picking individual stocks is so difficult and too risky for normal mums and dads.
The health sector again is also at a very fragile stage. Currently, hospitals are full, drugs are being sold by the shipload and everyone is trying to create a vaccine. If one company develops the vaccine tomorrow then that company will make billions overnight. But the pharmaceutical companies that did not create the vaccine will have massively over-invested into a failed endeavour. Do you know which company has the magic formula for the vaccine?
Is there a crash around the corner?
If we go back to the S&P 500, then we believe that there is potentially a very big crash around the corner. At some point, the markets have to realise what condition the world economy is in and a correction will happen. It is the job of big banks, investment houses and pension providers to protect their clients and shareholders money and this could result in a massive sell-off, resulting in share prices falling by the second.
What should I do?
Realign your investments. There are investment funds that make money when markets head south and there are also investment managers who are good enough and fast enough to react appropriately to market changes. But, you can only take advantage of their skills if you move your investments before the crash happens.
If you are invested, have a pension or own anything related to the financial markets, you need to speak to a professional today before it’s too late.