- Nearly 800,000 people have created new brokerage accounts on three of the major specialized platforms in the United States since the coronavirus pandemic hit the country
- This means that a huge number of newcomers are placing bets on the markets in the face of such an uncertain situation that hundreds of companies have revoked their earnings estimates for this year. There is no model that can predict what is going to happen to the economy or the market
- The consequence is that many people in the throes of spasmodic waiting for a coronavirus vaccine are betting in favor of potential cures and treatments. Only during the past week, the market has earned two billion dollar companies that have conquered the front pages of newspapers without providing any concrete data
- These behaviors are really stupid, and many people will suffer serious harm
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There are many words that are used by people who monitor the market to describe the condition they are in at a particular moment. Sometimes it is “variable”, sometimes “entrancing”. Right now it’s “stupid“.
A perfect storm created this stupid situation, to which each new event contributes in its own way. Obviously all these events are related to the most important thing that is going on in the world right now: the coronavirus pandemic.
Because of the virus, millions of people in the United States are locked in their homes to get bored, in some cases without a job. And consequently, according to the Financial Times, many of these bored citizens have created an account on a brokerage platform – even 780,000 people, taking into account only three of the four brokerage company largest in the country, namely Charles Schwab, E-Trade and Interactive Brokers.
This herd of rookies stormed the market in an incredibly uncertain moment. Hundreds of companies listed on the S&P 1500 index have revoked their earnings estimates for this year, leaving these new investors few indications on which to base oneself in terms of prospective estimates.
We know that the second quarter will be far worse than the first, but whoever is convinced they know how much it will be worse he is trying to declare the final score of a match before it has ended, and after the rules have completely changed.
You won’t find it no genius on Wall Street, the Federal Reserve or NASA can predict what’s going to happen on the stock market. As a result, however smart your friend who has just opened a trading account thinks you are better off telling him (with kindness) that even he can’t know.
We are all too emotionally excited to trade pharmaceutical companies right now
The trading is a complicated business, as anyone can confirm it, and it is largely a psychological game. To do it right you have to understand your emotions and your own bias or partial attitudes. This is why there is an entire improvised sector of “coach-psychiatrists” for traders.
Right now, almost every human being on this planet has a partial attitude towards discovery of a vaccine or a cure for coronavirus. The market is reflecting the depth of emotion behind it bias through the huge fluctuations that suffers every time a news comes out, however slight, about a decisive discovery linked to this or that vaccine.
We have seen in recent daysthe two companies conquer the first pages in the newspapers without being even remotely in possession of the necessary data to support their claims. The headlines that had the most impact were those on Modern, who said on Monday morning that patients involved in a trial for her potential vaccine had shown a positive immune response.
Read also: Suspicions of financial speculation behind the Moderna vaccine announcements
The news made the market lose its head. The company’s stock went up 26%. The CEO of Moderna, Stephane Bancel, granted an interview in triumphalistic tones to Joe Kernen of CNBC, who took his statements at face value. The company literally collected $ 1.4 billion overnight. The rally has extended to the entire market. It was really the typical Cinderella story.
It took well 24 hours before investors actually read the results of the Moderna clinical trial, according to which only eight patients had developed antibodies against coronavirus. The market also noted that the National Institute for Allergy and Infectious Diseases, which was partnering with the company, did not publish a confirmation of the results as it usually does.
Once investors digested these developments, Moderna’s stock has slipped by more than 10% and the market has followed him hand in hand. Nobody had conducted the appropriate research, and nobody has since apologized. Welcome to Wall Street. However, the market has not learned the lesson. Inovio Pharmaceuticals announced last Wednesday that its potential Covid-19 vaccine had produced positive results in a group of animals, and that it expected to have data to provide within a few weeks. The stock appreciated by over 8%.
The pharmaceutical sector was already not very transparent and prone to scams before this pandemic. From now on, every single participant in the stock market has now pointed to the fact that certain companies in the sector obtain a certain result. Each of these investors absolutely want to be the person who will get rich thanks to a life-saving treatment. In reality, he will be afraid of losing winning opportunities. I, who have an extremely active subconscious, would not have been able to imagine a more ideal circumstance to persuade investors to separate from their money, if I had tried.
Manufacture of products and models
Wall Street obviously is no longer in the skin from the desire to find something to cling to in this moment of uncertainty. Inside it already dominates a culture in which the original ideas tend to arouse disapproval (they could annoy the boss or the client on duty), each new hypothesis is based on models developed in the past and all fuck each other’s work.
There is no model for making predictions about the restarting of the economy after the coronavirus pandemic, and the one that comes closest – the model based on China’s experience – is not fit for purpose. Not only because the figures that this country has provided to the world on the damage done by the coronavirus inside it are extremely suspicious, but because the United States will simply not get up in the same way that China did. These two economies are too different from each other.
Some on Wall Street realize this, others don’t. In the group of people who are aware of it we could include Robin Xing, chief economist Morgan Stanley for China, and Andrew Sheets, chief cross-asset strategist of the same company.
In a short investor podcast, Xing explained what China’s observers already know: the economic recovery in the country was driven by the manufacturing and industrial sectors. The the service sector, in particular as regards transport and leisure, is still rather inactive. Consumption is modest, given that families and small and medium-sized enterprises (which make up a large part of the private sector in China) were most affected by the deep freezing of the economy due to severe lockdowns.
This is bad news for the United States. Their economy is mostly made up of small and medium-sized enterprises in the service sector. Consumption is the strong point of the country. Manufacturing is such a small part of the total that it has been the worst since the financial crisis for this sector last year – and the US economy has moved on, leaving it behind.
It will not be the manufacturing sector that will bring the United States out of this state of economic malaise; it simply does not have sufficient scope to do so. The coronavirus pandemic has affected the economy of this country in the most delicate area, that of services. The model based on the Chinese experience will not work in this case.
Summing up, a terrible chaos reigns over the US stock market. It is populated by bored investors, inexperienced and in the throes of intense emotional conflicts, who fumble in a murky puddle in which one of the less transparent sectors is able to lift the highest waves. Stupidity rages, and many people will eventually drown.
This is an editorial. The opinions expressed are those of the author.