This week S&P500 has bounced back to pre-COVID levels. Many have been surprised by the resilience of the equity markets over the past 3 months. In my opinion, the intervention by the Fed in March 2020 has momentarily helped avoid a crisis and it makes it look as though the markets have been resilient. There may potentially be another market meltdown this year around Q2/Q3/Q4 results of publicly traded companies or if / when there is a resurge in COVID cases.
In March 2020, the Fed intervened and broadly did two things that have been helpful for the equity markets:
Corporate Financing & Short Term Collateralized Loans: The Fed setup a program to loan capital to struggling corporates in return for reasonable interest rates / coupons. This was a necessity for many struggling businesses. This helped resolve liquidity issues and keep many small medium enterprises in business.
Lowered Interest Rates: The Fed reduced rates so that the interest in the US Treasury Bonds market remains and the banks that are dependent on overnight financing facilities (repo transactions) are not massively impacted by the financial stress. The interest payments for borrowers also reduced with lower interest rates. This helped the businesses and therefore its employees (and their families) keep their jobs during the crisis. Lower interest rates also inflate asset prices and this manifested in the equity market pushing stock prices up.
The Fed has been criticised for using tax payer money to intervene and save the stock market from collapsing. There have been suggestions that the scarce financial resource could have been used to fund other things like Medicare or Student Loans or unemployment benefits or a million other things that can be fixed in the US. But, unlike the Financial Crisis in 2008-09, this Fed intervention did not erode tax payer money. This was not a bail out. This was a much needed intervention without which the markets would have gone into turmoil. I also think its a bit unfair to say that the Fed lowered interest rates to benefit short term stock market investors and investment bankers. Lower interest rates have the effect of inflating asset prices. This may give a misleading signal that the stock market is resilient. But, any short term gain will be wiped out in the long run if the underlying business model of the company does not adapt to evolving market conditions.
I want to highlight the investments I recommended and stuck to between 03 May 2020 and 08 June 2020. During this period any investment strategy may have worked as the stock market was generally bullish but I am quite happy with the stocks I picked that generated 22.5% over a 4-5 week period (assuming equal weighting to all the stocks picked). It was a period when I did not want to be actively trading in and out of positions every day. So, I wanted to pick relatively safe stocks that I was expecting will go up in value. There are many other higher beta stocks that have performed significantly better than my stock picks!
As explained in my investment criteria blog, I pick stocks based on the following key criteria:
Nearly self funding company and / or creating material value - This is determined by Enterprise EPS and Defensive EPS compared to their announced EPS in my Earnings Power Box calculations
Resilient i.e. well protected from bankruptcy. And even if the company is to fail, it can go into resolution without causing any interconnected failures in the market
Future Growth potential
Stock is in the trading window per Bollinger Bands i.e. stock being bought enough by other investors indicating at least a potential short term increase in stock price
So, here are the stocks and the price changes / returns between 03 May and 08 June:
What is your story trading stocks this past quarter when the S&P500 has bounced to pre-COVID levels?
Comments