Our society got hit by worse pandemic, we never expected. Loss of life and loss of job became a major worry for our society. If we see the effect of pandemic, it left a big scar on low- and middle-income people and created a huge wealth gap in our society. Economy is suffering, as 36% of small businesses has closed their doors for ever, job loss numbers rising, interest rate at all time low but miraculously stock market is performing extraordinarily. From its all-time lows to its all-time highs, what a journey to watch? Memorable year for many millennial traders and investors. We did not follow the fundamentals just traded on instinct, guts, social media, trust on companies and its leaders. Sometime just followed the upward market momentum without even thinking about its valuation. Almost the traders forgot the “buy low, sell high” theory and a new theory came up “buy high and sell higher”.
If we do go by statistics, then its quite surprising why the market keeps on rising when the death and virus (Covid-19) spread keep increasing. No logic works, but generally economy and stocks do not go side-by-side, economy is more about small and medium size businesses in our society which helps the GDP to grow. Most of them are not listed to any exchanges and if we do give a look this is the sector that suffered most, almost 36% closed permanently forever. In coming days’ closure and bankruptcy will keep increasing for small and medium size businesses. About half laid off or furloughed employees. Small businesses related to industries like accommodations, food service and educational services are affected most due to change in customer behaviour. Specially the mandated restrictions that begun in pandemic. According to Fed research small businesses face both financial and COVID related challenges. Before COVID-19 crisis, small businesses accounted for nearly half of all private jobs. So widespread business exit wreaks a long-lasting unemployment and economic damage than temporary shutdowns do, so its important for policy makers to understand and help business leaders to recover for this short-term crisis.
COVID-19 became the main cause for the market decline in February & March -2020, the indexes dropped almost by 37%, this is drop around $1trillion. But surprisingly market recovered most of that losses by end of August 2020. Unemployment figures keep rising, economic slow down continues and the uncertainty about future recovery, it is easy to wonder if the stock market rally is disconnected from the real economy. The V-shape recovery pattern varies across industries and even across companies. So, its amazingly simple as stock market is just a reflection of future value of given companies, this means big fish are doing ok, but the little ones are hurting. Digital & tech companies did exceptionally well, and those companies drove the market higher. And, most importantly the world never seen such a fiscal or monetary support as it is seeing now. Global central banks cut interest rates 164 times in 147 days and committed for almost $8.5 trillion US stimulus. Also, many young and new to investing joined the market, the brokerage industry added more than 10 million new accounts in 2020, with Robinhood alone representing 6 million. Millennials make up almost 30% of retail trade an increase of almost of 35% over three years.
Bored at home, many people turned into stock market as day trader for entertainment and profits. Day trading became the biggest popular activity worldwide since the onset of Coronavirus pandemic. Commission free trading platforms helped to grow new and inexperienced traders. Another major reason can be a replacement of “lost income”, unable to go out, watch sports or bet in casinos and also the YouTube & TikTok video sharing platforms is attracting young people in day trading. The video sharing platforms are trying to create a bigger impact in people’s mind in creating wealth at short-term, the impact we can see at stock market. But the problem is people are not understanding – “promise of big gains in short-term can be dangerous and maybe they are more likely to suffer big losses.” If we check Reddit, it filled with tales of some investors turning a small investment into a million-dollar gain overnight. There also some sad stories like Alex Kearns, who took his life, believing he had lost $750,000.
Boom in day trading is overly exciting – but on day trading Berkshire Hathaway’s VC Charlie Munger, says “I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin,” he told the attendees. “It is really stupid.” But Mr. Munger was not wrong, as research by neuroscientist Hans Breiter shows the same part of the brain activated by drugs like cocaine is also triggered when a person anticipates a financial gain. That has been supercharged in the new era of online trading platforms. “The parallels between video games and day trading are becoming closer and closer,” says Andrew Lo, a finance professor at Massachusetts Institute of Technology. “For many gamers, particularly the younger ones who are not used to trading and don’t fully understand the impact of significant losses and gains on their psychophysiology, it could have some significant adverse consequences.” The consequences include fear, anxiety, regret, frustration, and disappointment, and even symptoms of post-traumatic stress disorder for those who made large losses early in their careers. In past signing up with online brokerage was a fiddly and time-consuming task, but technology today made it in just minutes. Traders even can use advanced instruments like options & borrowing in money on ‘margin’. As Robinhood traders can sign up to its “gold” membership, which costs $5 a month after a free 30-day trial. This allows traders to make bigger bets with money borrowed from Robinhood. The only restrictions are that federal regulations require a trader to have at least $2,000 in their brokerage account and “a suitable investment profile in order to use margin”, which Robinhood determines with a few questions on the trader’s experience, aims and sensitivity to risk.
But use of options can be dangerous, as options are financial derivatives that gives investors extra exposure to a stock or equity index failing or rising with a minimal premium, magnifying gains but also potentially enhancing losses. According of Goldman Sachs the option trades this year valued to $5.2 tn, roughly doubled level seen five years ago. Most popular stocks among day traders — such as Chipotle, Amazon and Tesla — single contracts account for between 20 per cent and 30 per cent of the option volume. Allianz on its June report says, “One only has to spend some time on popular Reddit communities to get a broad idea of the current market hysteria and the risks that ‘new retailers’ are taking,”. The problem in today’s market is anyone can come in and think they can do it, “you can’t lose right now and that the problem”. I feel sad to say but many people going to get wiped out when the market does fall, and it will be horrifying. I think people are making huge mistakes and ruining their financial future. Its more like gambling than investing, as we can see the price hike in GMC, AMC, NOK, BB & HTZ. Billionaire Leon Cooperman says “Robinhood markets are going to end in tears,”. So we will wait and watch this mom-and-pop investors, how long they can outperform the market ?