Our Thoughts On The Very Irrational Market Behaviour

It’s been more than a week since Mr and Mrs Budget wrote something here.

To be honest, we want to write more but have been running out of topic to write. So if there is anything you’d like us to share more about, please feel free to drop them in the comments below. We love hearing from our readers.

So today we wanted to share an observation that we made over the past few days.

It seems as though market has reentered the bull market again, where it has gained 20% since the low just 3 weeks ago. Every other day market seems to be rallying. Stock prices continued to charge upwards as if nothing happens.

This has definitely triggered a lot of FOMO feeling amongst investors, Mr and Mrs Budget included.

To overcome the FOMO in us, we have to resort to discussing and reassuring to each other than this cannot be a V share recovery. And it seems as though this is more of a very irrational investing behavior as opposed to keeping up with what is happening on the grounds.

COVID-19 No Signs Of Slow Down Yet

First of all, there is still no signs of a successful development of a vaccine towards the covid 19 virus.

Everyday there are more new cases globally and the graph is still an upward sloping graph. While the daily new cases globally seems to be tapering off, but I think there are still under reported cases globally.

Daily new cases seemed to be plateauing

If consumer confidence are not restored, how can share price increase to pre covid 19 pricing?

Weak Business Fundamentals Not Announced Yet

COVID outbreak and the lack of vaccine aside, business fundamentals are still giving out waves and waves of bad news. AGMs of companies are pushed back, and companies like Lendlease are announcing revisions to their projected dividend.

Other than that, what we have heard from F&B owners is that traffic and business has plunged by more 80% during this circuit breaker period where everyone is required to stay at home. Streets are all quiet and people are not spending any money at all.

Empty Orchard Road

With companies increasingly going out of business, this means unemployment will increase as a result of that.

All the signs on the ground are pointing to negative signs – how can this be a V shape recovery? PM Lee also mentioned that this will not be a V or U shape recovery.

“It is going to last quite a long time: it is not a V-shaped down dip, it is not a U-shaped dip.” – Lee Hsien Loong

Bad Economic Projection Globally

If you have been following the news, there are certain big headlines recently that should warrant some worries from the financial market, but yet the market is rallying every other day.

According to International Monetary Fund chief Kristalina Georgieva, the outlook for global growth was negative and the IMF now expected “a recession at least as bad as during the global financial crisis or worse.” This was back 3 weeks ago.

Let’s take a look at the chart above – if you look at the past 2 major financial crisis – the Financial Crisis in 2008 as well as the dot com bubble in 2000, the peak to bottom is more spread out and takes longer.

Comparing that to COVID 19 where the impact should theoretically be a lot worse than the previous crisis, the chart clearly shows that we are still at the beginning of the crisis.

Even during the 2009 financial crisis or the SARS crisis, people are surely still spending, unlike now where the whole of Singapore is under a “lockdown”.

The latest world economic outlook published by IMF also paints a similarly bad picture where global economies is set witness one of the worse economic contraction in history.

So we need to reassure ourselves again and again that after looking at the recent bull run up, the worse is yet to come. How can this be a V shape recovery and how long more can we expect the prices to go up?

For those who are almost 100% vested – surely it doesn’t make any logical sense for prices to recover back to 3 months ago with all that has happened?

How can the market price behave as though nothing is happening outside in the real world, and that we can just “discount” the impact of the COVID 19?

This reminded me of the feeling when bitcoin prices are hitting its all time high every single day about 2 years back. Everyday the prices are just going higher and higher, until everything starts falling apart.

Giving Into FOMO

Of course, while it is easy for us to rationalize all of this, but we are all but weak humans filled with greed.

To avoid missing out in case we are wrong, and caving into our FOMO-ness, we made 2 more counter purchases over the last few days:

  1. SPH REIT – Trading at below NAV and may go into the student accomodation business, with a 45% upside.
  2. Centurion – Trading at below NAV (0.54). Been holding onto Centurion, exited it few weeks ago, and reentered again at a lower price, with a 47% upside.

What we have been buying is into companies which fulfill these requirements:

  1. Below their NAV – great businesses which are undervalued now
  2. Has a good sponsor – wont close down
  3. At least 40% upside to previous high

If the prices plunge further, we are more than happy to average down on the counters we picked up over the past 2 weeks.

With the two new entries onto our portfolio, here’s an update to our war chest:

Mr Budget War ChestS$70,000
Mrs Budget War ChestS$30,000
Mr Budget Home Loan War ChestS$50,000
Mrs Budget Home Loan War ChestS$150,000

Our home equity loan has still not come in yet so hopefully that will be in soon for us to do our cash allocation strategy.

Through it all, we need to constantly remind ourselves that, this is most probably not a V shape recovery, and it is very irrational to expect prices to keep going up.

So if you are feeling FOMO – it’s a normal feeling and you are not alone, but please dont let irrationality takes over.

If you have to take some action, like us, please only buy in small batches and only on counters which will not crash too badly if there’s another upcoming crash. Don’t go 100% vested now. Currently, counting our incoming home equity loan, we are probably only using 20% of our available war chest.

Stay safe folks! 🙂

Also do let us know what topics you’d like us to cover or if you have any questions to ask us.

Also Read: What Have We Done This Month Towards Our Financial Goals – March 2020

Like our Facebook Page for more articles like this: Mr Mrs Budget

14 thoughts on “Our Thoughts On The Very Irrational Market Behaviour

  1. Hi Mr and Mrs Budget, I totally agree that the market has gone irrational. While the COVID-19 cases have not yet gone down, the stock market went up. Except for SPH REIT, most REITs have not announced their latest financial results due to the postpone of the AGM due to circuit breaker. We most likely will see some pressure on REITs either next month or the month after when AGM happens and poor business results are revealed.

    Like

  2. Roger

    My assessment is that stock prices should be facing a significant plunge in the weeks ahead. I agree with your thoughts. I would urge people to sell now so as to reduce their exposure. Not a time to buy at all. Just wait a few more weeks. More bad earning and unemployment news will come out.

    Like

    1. Mr Budget

      Thanks Roger! Yeah we are half hoping that the market will drop by another 20% to 30% so we can pick up some counters we are eyeing.

      Like

      1. Bananamint

        I see your view. On the other hand, please allow me to share my view. This is not a financial crisis. It’s more of a health crisis. Asia stocks were not overpriced before the crash happened also due to the correction caused by trade war.

        Market psychology is hard to understand but it seems like lifestyle have already priced in the “damage” for the first two quarter at least. Because all these bad news can be “foreseen” at an earlier step and the market usually reacts faster than the actual event.

        Like

      2. Mr Budget

        Ahh that’s an interesting way to think of this.

        We are thinking more from a company’s revenue perspective. If people are not spending, the whole market is facing a demand shock. And this demand shock is not just a local demand shock but global demand shock. Seems a bit irrational for prices to discount all of these impact. The current price discount is probably at 20% from market price 3 months ago, and 20% seems like a v small correction as compared to the magnitude of what’s happening now. Being vested 100% now is like accepting the fact that everything is already priced in, which seems highly unlikely.

        But u are right, we will not know what is really happening haha.

        Like

  3. Benjamin See-Toh

    My thoughts: Markets seem to rally with force on the slightest hint of *possible* good news, e.g. Sanders dropping out of presidential race, leaked news of drug remdesivir showing some promise. On the other hand, bad news has been overwhelming, so infections and deaths, jobless reports and possibly even poor earnings have all been more or less “priced in”, like it’s just a new normal. It’s a shitty normal, but a certain one.

    People are reacting disproportionately because they’re desperate for any good news now.

    Like

      1. Benjamin See-Toh

        Nope, I’m only about 30% vested right now. Managed to buy some positions at the dip (lucky timing) and sold some during the recent rally to take profit.

        Like

  4. Mr X

    Market is pricing in a strong recovery in Q3 and Q4. I think the only way markets are going to drop another 10/20% is a second wave of infections globally. Which forces a second shutdown after reopening. Odds of that happening is getting lesser as people start taking precautions as a new normal.

    Like

    1. Mr Budget

      Hi Mr X,

      The way we look at it, there are still many ways the market is going to drop further:

      – corporate defaults (lesser revenue > no money to support loan payments)
      – consumer defaults (no job > cant pay credit cards / sch loans / car loans)
      – businesses winds up
      – global travel demand hit harder than expected > weak consumer spending
      – housing / manufacturing slowdown (no material supplies because noone working)

      We will be super confused with the market if it goes back to precovid price levels in the next 3 months. But anyone’s guess is as good as ours!

      Like

  5. Benjamin See-Toh

    I’m inclined to agree w/ Mr Budget. I definitely feel bearish about the market, but then again I’m a young 28 year-old who’s looking for optimal entry points as opposed to a 40-50 year-old who’s possibly more keen on protecting his nest egg, so that may be influencing my lens onto this situation as well.

    As of now, the market rally *seems* to have lost some steam, and bull-bear sentiment seems split among the big financial players/gurus. This is as opposed to some 1-2 weeks back when the noise over the bull-bear split was in favor of the bulls. The bulls’ assumption is that the economy will return to normal or at least start to do so by Q3/Q4. There’s some points I gathered from a current snapshot for us to consider that *may* suggest that the recovery may start later than the bulls expect:

    – The daily rise in US cases are supposedly “tapering off”, and there’s a huge hoo-hah over “rights” in Michigan and Minnesota right now because people want to get back to work. So Trump wants the economy to go back to normal (as most bulls do), and the governors are fighting back on this. But the official case count does not factor in the fact that testing is limited in the US. They simply don’t have enough testing going on to accurately measure the extent of the outbreak. Of those they do test, 1 out of every 5 tests return positive. That high test-positivity rate seems to suggest that a lot of untested people actually have the virus. (https://www.theatlantic.com/technology/archive/2020/04/us-coronavirus-outbreak-out-control-test-positivity-rate/610132/?utm_medium=offsite&utm_source=medium&utm_campaign=all&fbclid=IwAR3ZYzOdh-hXrgxPr-ZKefyoWjkqHEJ382JiZQGfyHHxTO4pFUK-ihr6JOU)

    – Latin America, Africa and SEA all seem to be the next hotspots. Latin America (Brazil, Chile etc.) is at 100,000++ detected cases. We know how bad it’s getting in Indonesia. In East Asia, Japan just passed the 10,000 cases mark, and let’s not forget that both China and South Korea still have cases of people who supposedly recovered but are testing positive again. We also have people in Singapore’s hospitals who have no symptoms for 28 days and STILL test positive. Which brings me to my next point…

    – We still don’t fully understand this virus. Is there the traditional immunity granted by antibodies after a person recovers from a viral infection? If so, why are so many testing positive again? As much we would LOVE to have a cure or at least some form of anti-viral treatment in remdesivir, I seriously don’t see how we can go back to work as normal without some form of prevention in a vaccine. It’s just too risky.

    – Stimulus-wise, QE has begun to taper down to about $75 billion for this week from a high of $586 billion 4 weeks ago, but all this while its SPVs haven’t been buying default-risk level junk bonds, so we still have quite a risk of defaults (https://wolfstreet.com/2020/04/17/fed-massively-tapered-qe-4-hasnt-bought-any-junk-bonds-yet-was-just-jawboning/). First round of PPP loan quota of $350 billion has dried up almost instantly; they’re looking at another $310 billion more, but demand for the loans is sky-high. Firms have begun plans for lay offs, and we’re starting to hear of firms going into insolvency and defaults (i.e. Hin Leong, Neiman Marcus). We’re only like 1 week into earnings season, and let’s not forget the jobless claims numbers coming in on Thursday.

    – Like I previously mentioned, the recent market rally seems to have lost its steam, and bearish sentiment is increasing slowly. Short bets on the market are rising. (https://www.wsj.com/articles/bets-against-the-stock-market-rise-to-highest-level-in-years-11587288601?mod=hp_lead_pos2&utm_source=morning_brew)

    We’ll just have to wait and see!

    Like

  6. Ben

    Hi, could you please share some advice on getting started with investing?

    A little background about me is that I am graduating from a local university in July and that I am looking to start on my investing journey currently.

    Hence, I would appreciate any insights/advice pertaining to this matter.

    Thank you!

    Like

    1. Mr Budget

      Hi Ben!

      Thanks for dropping by! Congrats on getting started! We wish we started as early as you did!

      Probably the biggest advise i can give you is that, just get a brokerage account, deposit S$1000 inside, and buy any US stocks now (fb, mastercard, adobe, google, amazon etc). Once you bought ur first stock, everything will fall into place – you will be force to look and understand investing. Dont worry about making or losing money for your first purchase, because even if you lose lets say 10% in 2 months, its just S$100 – that is a good cost to pay as opposed to procrastinating and starting later because you will lose out even more time. Also in the long term, these us stocks should most probably be worth more than what you bought today. 🙂

      So long story short – start a brokerage account (saxo, fsmone) today, and just close your eyes and buy 1 stock.

      Other advise – read up more, reduce expenses, increase income, have high savings rate. 🙂

      – Mr Budget

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s