Why Stocks Soared While America Struggled

You would never know how terrible the past year has been for many Americans by looking at Wall Street, which has been going gangbusters since the early days of the pandemic.

“On the streets, there are chants of ‘Stop killing Black people!’ and ‘No justice, no peace!’ Meanwhile, behind a computer, one of the millions of new day traders buys a stock because the chart is quickly moving higher,” wrote Chris Brown, the founder and managing member of the Ohio-based hedge fund Aristides Capital in a letter to investors in June 2020. “The cognitive dissonance is overwhelming at times.”

The market was temporarily shaken in March 2020, as stocks plunged for about a month at the outset of the Covid-19 outbreak, but then something strange happened. Even as hundreds of thousands of lives were lost, millions of people were laid off and businesses shuttered, protests against police violence erupted across the nation in the wake of George Floyd’s murder, and the outgoing president refused to accept the outcome of the 2020 election — supposedly the market’s nightmare scenario — for weeks, the stock market soared. After the jobs report from April 2021 revealed a much shakier labor recovery might be on the horizon, major indexes hit new highs.

The disconnect between Wall Street and Main Street, between corporate CEOs and the working class, has perhaps never felt so stark. How can it be that food banks are overwhelmed while the Dow Jones Industrial Average hits an all-time high? For a year that’s been so bad, it’s been hard not to wonder how the stock market could be so good.

To the extent that there can ever be an explanation for what’s going on with the stock market, there are some straightforward financial answers here. The Federal Reserve took extraordinary measures to support financial markets and reassure investors it wouldn’t let major corporations fall apart.

Congress did its part as well, pumping trillions of dollars into the economy across multiple relief bills. Turns out giving people money is good for markets, too. Tech stocks, which make up a significant portion of the S&P 500, soared. And with bond yields so low, investors didn’t really have a more lucrative place to put their money.

To put it plainly, the stock market is not representative of the whole economy, much less American society. And what it is representative of did fine.“No matter how many times we keep on saying the stock market is not the economy, people won’t believe it, but it isn’t,” said Paul Krugman, a Nobel Prize-winning economist and New York Times columnist. “The stock market is about one piece of the economy — corporate profits — and it’s not even about the current or near-future level of corporate profits, it’s about corporate profits over a somewhat longish horizon.”

Still, those explanations, to many people, don’t feel fair. Investors seem to have remained inconceivably optimistic throughout real turmoil and uncertainty. If the answer to why the stock market was fine is basically that’s how the system works, the follow-up question is: Should it?

“Talking about the prosperous nature of the stock market in the face of people still dying from Covid-19, still trying to get health care, struggling to get food, stay employed, it’s an affront to people’s actual lived experience,” said Solana Rice, the co-founder and co-executive director of Liberation in a Generation, which pushes for economic policies that reduce racial disparities. “The stock market is not representative of the makeup of this country.”

Inequality is not a new theme in the American economy. But the pandemic exposed and reinforced the way the wealthy and powerful experience what’s happening so much differently than those with less power and fewer means — and force the question of how the prosperity of those at the top could be better shared with those at the bottom. There are certainly ideas out there, though Wall Street might not like them.

How the stock market boomed when American life soured

Many on Wall Street, like many people in America, were in denial about the realities of Covid-19 when it first began to take hold internationally in early 2020. In an interview with Vox last April, CNBC host Jim Cramer recalled wondering whether “another shoe will drop on this coronavirus outbreak” in early February, only to see stocks keep rising steadily. “But nothing happened. The market kept quiet,” Cramer told Vox. Indeed, stocks continued to reach record highs.

While stocks often rise slowly, they also fall fast. And once Wall Street caught on to the realities Covid-19 might bring, the market tumbled, wiping off some 30 percent of its value from mid-February to mid-March. “No one had any idea of what the future was going to be, how deep this is, how long it would be, how wide it would be,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

The S&P 500 bottomed out on March 23, just a week into New York’s shutdown, and after that, it made a remarkably strong recovery, month after month.

Most analysts and experts point to the Fed as the most important factor in supporting market confidence. The central bank announced a series of big measures to help support the economy and markets in March 2020, including saying that it would buy both investment-grade and high-yield corporate bonds (basically, debt that is risky and debt that is not).

“Not dissimilar to the global financial crisis, the Fed stepped in, and that was really a catalyst for a stock market recovery,” said Kristina Hooper, chief global market strategist at Invesco. “The Fed can be very, very powerful, almost omnipotent, when it comes to the stock market.”

Throughout the crisis, the Fed and Chair Jay Powell have made clear they will support markets and use every tool in their toolkit to do it. Powell has taken an extremely dovish tone and repeatedly said the Fed won’t raise interest rates — which would presumably slow down the economy and markets — preemptively. Basically, the markets let the Fed take the wheel.

Even if it didn’t buy bonds itself, the knowledge that it would if necessary reinforced the markets — private investors swept in to take up corporate bond offerings from companies such as Boeing and Nike. Continued confidence in a dovish Fed has only reinforced market bullishness; while a bad jobs report may be bad for businesses and workers, to investors, it’s also more reassurance that low interest rates aren’t going anywhere.

The issue is, the Fed is a much more powerful force on Wall Street than it is Main Street. Its programs to help small and midsize businesses and states and cities have been far less effective than those set up to help corporations and asset prices.

“It now feels like policy, be it the Fed or something else, that the stock market should really never go down,” said Dan Egan, vice president of behavioral finance and investing at Betterment.

To be sure, the Fed’s role is monetary policy, and it would have been bad if markets were allowed to crash or a litany of major corporations went bankrupt. And luckily for many struggling people and businesses, Congress stepped in with fiscal policy that could be more effective in helping the broader economy — a move that, no doubt, also helped markets. It’s good for corporations that people have money to spend.

Still, some wonder whether the Fed couldn’t have tried to go further to make sure its programs to support corporations flow to people other than shareholders. “Obviously it was good, the Fed needed to do something,” said Alexis Goldstein, senior policy analyst at Americans for Financial Reform. “But the criticism I would weigh was that there were no real conditions that workers were protected or rehired, that all the gains just didn’t go to the top.”

Goldstein pointed to a September report from the House of Representatives’ Select Subcommittee on the Coronavirus Crisis that found the Fed bought corporate bonds from at least 95 companies that issued dividends to shareholders while also laying off workers. “Surely the Fed is also so powerful that it can say, look, we need you all to prioritize rehiring your workers or we’re not necessarily going to rescue you, we’re going to rescue other companies, and that should be impactful,” Goldstein said.

Companies have been ruled by the mantra of shareholder primacy, where maximizing profits for investors is the end-all, be-all, for decades. Worker pay has severely lagged gains in productivity. Those trends were unlikely to change during a pandemic.

“Shareholder primacy means the job of corporations is to increase their share prices for this very small elite, and that means downward pressure on costs, including workers, where possible,” said Lenore Palladino, an assistant professor of economics and public policy at the University of Massachusetts Amherst. “The fact that the stock market is booming is because of the financialization of our goods- and services-producing companies, not because the real economy is doing so well.”

The market felt better about the pandemic than you probably did

Jack Ablin, the founding partner of Cresset Capital, recalls calling clients in the spring of 2020 and telling them they didn’t know how long the lockdowns and virus would last, but they were “confident” that within a year, it would be done. “Of course, it wasn’t,” he told Vox. But the general attitude remains: The markets figured things would get better, sooner or later. “Part of it was saying, look, this is temporary, we will eventually get back to business. So we were trying to look past the valley to the other side of normality.”

Not everything had to break in Wall Street’s favor for the market rally to continue — as mentioned, between the Fed and the future promise of corporate profits, investors had plenty of reasons to be confident — but it doesn’t hurt that it kind of did. The vaccine, which at the outset of the pandemic some experts warned might be years away, appeared by the end of 2020. Donald Trump did not want to accept the results of the 2020 presidential election, which some investors feared would spark chaos before voting day, but by and large, the US saw a peaceful transfer of power (with the exception of a riot at the Capitol, that, while disturbing, didn’t have anything to do with the Dow).

Investors also seemed confident that Congress would come through with more fiscal support for the economy. This, too, was not a given. The $900 billion package passed in the lame-duck session in December for months seemed highly unlikely. Had Democrats not taken both US Senate seats in Georgia, the $1.9 trillion American Rescue Plan, signed into law in March, would not have happened. While neither provided direct support to the markets, they did support the broader economy that the markets have for months been bullish on. Putting money in people’s pockets means they’ll spend it. It’s good for Wall Street that Main Street America doesn’t fail.

Some people in the industry point to a certain level of faith in America, like the type legendary investor Warren Buffett channeled during the financial crisis and Great Recession when he told people to “buy American.”

“You have to have an existential faith in America in order to be in stocks over the long term,” said Nick Colas, the co-founder of DataTrek Research.

“What has happened in the last 14 months or so is we’re believing in America again, we’re believing in our companies,” said Brian Belski, chief investment strategist at BMO Capital Markets. “From every bear market and every depression, we transition from despair to hope, and the hope was defined by American companies.”

It does look like the US is poised to emerge from the pandemic much before the rest of the world and spend its way to an economic recovery that many other countries could not. Now, it’s the investors who sold out of the market when it was falling last year who have been left out.

“There are two lessons to be learned over the past year. The first is that economic headlines are lagging and not leading indicators of the market; and second, market timing is a losers’ game,” said Saira Malik, chief investment officer of global equities at Nuveen, an asset manager.

Nuveen is currently interested in emerging markets for potential investment possibilities on the horizon — including countries such as Brazil, which continues to be ravaged by the pandemic. “We do feel like in the near term they are going to struggle. But the vaccines are becoming more and more available, and while they’re lagging a bit behind, we do think they’ll catch up, and they’ve tended to have the cheaper valuations to go with that,” Malik said.

At this point, it’s hard to wonder what, if anything, will truly unnerve investors.

There are still plenty of risks to the market, including that in the US, President Joe Biden and Democrats may take steps to raise taxes that would mean a hit for the bottom lines of corporations and investors. When chatter of the president’s capital gains tax proposal kicked up in late April, the markets took a small dip, but it was hardly catastrophic.

“We have an administration that clearly has ambitions and wants to pay for them by taxing capital, taxing corporate profits, now taxing capital gains. The resilience of the market in the face of all that is kind of interesting,” Krugman said. “There may be a little bit of determined resilience; there may be some element of when people are determined to be optimistic, facts don’t matter.”

Hooper, from Invesco, offered up the explanation of the Fed. “I do think on a short-term basis, we could see a sell-off if there is a risk that appears imminent, but we have to recognize that all current risks are being cushioned by this incredibly accommodative Fed, which does have an impact. It’s a powerful upward force on stocks that can counteract the downward forces.”

What the stock market does and doesn’t represent

How the stock market does matters to a lot of people. A little over half of all Americans report owning stocks, including in their retirement or pension plans. And during the pandemic, plenty of people got into day trading, for better and for worse. But some groups have much higher stakes in the market than others. More than 80 percent of stocks are owned by the wealthiest 10 percent of Americans, meaning when markets go up, they’re the ones who reap the most gains. White people are also the overwhelming majority of market beneficiaries — by Palladino’s estimates, 92 percent of corporate equity and mutual fund value is owned by white households, compared to less than 2 percent each by Black and Hispanic households.

“People often forget how concentrated corporate equity holdings are,” Palladino said. “They’re held mainly by wealthy white households.” Those are the people who disproportionately reaped the benefits of the stock market’s pandemic run, while people of color disproportionately suffered the health and economic consequences of the disease.

If the US wants to create a fairer, less extractive economy where corporations and shareholders aren’t living a very different reality than people trying to pay their rent or find a job, there are ways to do it. The federal government could raise corporate taxes and tax income from investments in the same way it does income from labor and seek to rein in CEO pay.

It could also clamp down on shareholder primacy and make sure companies base their decisions not only on making their investors rich but also on the well-being of their workers, customers, communities, and suppliers. In 2019, the Business Roundtable, a major business lobbying group, issued a statement that it would redefine the “purpose of a corporation” as one that fosters “an economy that serves all Americans.” The government and the public could find ways to hold them to it. Palladino, in her work, has outlined a number of proposals that would curb shareholder primacy, including requiring corporate boards to have worker representatives, banning stock buybacks, and boosting unions.

Beyond policy fixes, there’s also just the reality that the market measures very one specific thing — how investors think (rightly or wrongly) corporate profits are going to be in the future. And for many people, that measure is meaningless. “If you can assess that the economy is good when we’re in one of the worst economic moments of American history, then it’s a useless measure,” said Maurice BP-Weeks, co-executive director of the Action Center on Race and the Economy.

The past year has been a truly wild ride in America and for the stock market, though in different directions. Investors are reaching almost exuberant levels, from the GameStop saga to the crypto craze. Stocks are continuing their bull run, with no clear end in sight. There are plenty of warnings that investors are out over their skis, but then again, there always are.

It’s a far cry from a little over a year ago, when billionaire hedge funder Bill Ackman went on TV to warn that “hell is coming” because of Covid-19. Or maybe it did — just not for Wall Street.

Source: Why the stock market went up during the Covid-19 pandemic and high unemployment – Vox

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References

 

Saefong, Myra P.; Watts, William (28 February 2020). “U.S. oil futures suffer largest weekly percentage loss in over a decade”. MarketWatch. Dow Jones & Company. Archived from the original on 1 March 2020. Retrieved 15 March 2020.

Day-Trading Cryptocurrency a Conjunction of Strategy and Execution

According to the latest report we have, there are about 51 million active crypto traders worldwide. This is an absolutely staggering figure, which amounts to about 0.6% of the worldwide population! For context, there are about 25 million software developers worldwide.

We couldn’t help but think: how many of those 51 million people deploy any sort of strategies in their trading? The answer is, on the balance of probabilities, not many. Which means a lot of people would benefit tremendously from educating themselves about trading strategies and finding what works best for them or maybe picking up a good cryptocurrency trading course.

In this article, we’re going to dwell upon some of the entry-level, yet undervalued crypto day-trading strategies and show why your trade execution and adherence to rules, in most cases, matter even more than the strategy itself.

What are the most undervalued cryptocurrency trading strategies?

You’ve probably done quite a bit of research into what trading strategies are typically deployed when day-trading cryptocurrencies. And thus, you probably know that there are a LOT of strategies out there. Needless to say, most of them are outright useless. So, what parameters should you apply when selecting the right strategy? Well, one thing is for sure: do not overcomplicate. Simplicity is key, and the simpler your strategy, the easier it would be to master (provided it works, of course).

Simple Moving Averages

Here’s an example of a common SMA strategy:

Timeframe: 4H

Moving Averages: 200, 12 and 26-period Exponential Moving Averages (EMA).

Whenever the price is below the 200-EMA, you should trade with a bearish bias (only take short-side trades), and vice-versa.

Whenever the 12-period EMA crosses below a 26-period EMA, this generates a sell signal and you should sell (or cover an existing long position). When the 12-period EMA crosses the 26-period EMA, you should buy (or cover an existing short position). It is also considered good practice to place your stop-loss below a previous low.

This strategy is a great, simple indicator of convergence and divergence between medium-term momentum and the short-term momentum, showing you when the price is accelerating in either direction, up- or downside.

An example of how this could be successfully executed is shown on a screenshot below:

A Confluence of RSI and MACD

The two most-used indicators – Relative Strength Index (RSI for short) and the Moving Average Convergence-Divergence indicator (MACD) can be proven very efficient when used together.

But in order to do so efficiently, you have to understand exactly how they work. Let’s see how each of them is calculated.

“RSI is computed with a two-part calculation that starts with the following formula:

The average gain or loss used in the calculation is the average percentage gain or losses during a look-back period. The formula uses positive values for the average losses” (Source: Investopedia).

For the second step, we need at least 14 data-points. Once we have them, we calculate the RSI and plot that along the price-action chart.

“MACD is calculated by subtracting the long-term EMA (26 periods) from the short-term EMA (12 periods)” (Source: Investopedia).

Thus, the MACD has three elements: the 12 and 26-period exponential moving averages, and the arithmetical difference between the two.

Both the RSI and the MACD are oscillators, meaning that both indicators calculate their values based on the price.

These indicators are best used when they complement each other. Meaning, if you have a confluence – both indicators are giving the same signal, either to buy or to sell, then you act on it; otherwise – you don’t.

A basic example would be:

On a 4-hour time-frame chart, when the MACD is producing a bullish signal (the 12-period EMA crosses the 26-period EMA to the upside), you execute a buy order. The trick here is to make sure that the RSI is complementing the MACD: if the price-action is not overbought (RSI is below 70), then you can execute the buy order. If the RSI is >70, this would mean the price-action is overbought and the indicators are conflicting with each other. And vice-versa: if the MACD is showing a sell signal, but the RSI is oversold (<30), you should not follow this sell signal.

Example:

On the example above, we can see how a trader has entered a trade when the MACD gave a bullish signal, placing the stop-loss under the previous low, and the RSI was not in the overbought territory. Once the RSI crossed 70, the trader exited their position and secured a safe, winning trade. You can also simply reduce risk (close part of the position) once the RSI hits 70.

Dollar-Cost Averaging

This one, being the only long-term strategy on the list, is probably the simplest as well. Basically, you just buy a fixed amount (or sell short, but be careful with that) of what you think are the most promising cryptocurrencies over set periods of time, averaging down (or up, if it’s short) their buy-in price.

The strategy has two distinct advantages: you don’t have to worry about the day-to-day price action since you’re buying for the long term, and it’s not as demoralizing if the market goes down – because then you just improve your average buy-in price.

A good example would be buying bitcoin once a week during the first quarter of 2019 when the price was consolidating between $3.3k and $4.3k. If you were actively trading during that period of time, chances are you’d get eviscerated as the price action was extremely choppy. However, if you DCA‘d, you’d be ripping the rewards just three months later, when the price hit $13k.

Why Execution Matters Just as Much as Having the Right Strategy

Probably by far the most overlooked aspect of trading out there: adhering to your game-plan. While it is detrimental to have an actually working, well-backtested strategy to trade with, it is just as important to always remember that you have to actually play by the rules set in the said strategy.

Many traders suffer from emotional trading, a phenomenon known in the trading community to be the most challenging aspect of trading. This includes things like:

  • Chasing your losers – widening your pre-determined stop-losses to “give the trade more breathing room”
  • Using excessive leverage when being on a losing streak
  • Executing trades before the actual signals are triggered by the indicators you’re using
  • Cutting the winning trades too early

Experienced traders will tell you that the right execution of trades is what comprises most of your P&L. Thus, setting clear rules, adhering to them and constantly checking whether you need to improve your execution is key to the successful deployment of any strategy.

So, what are the questions you should ask yourself when deciding whether you’ve executed well? Here’s a list:

  • Did I execute that trade because my strategy told me to do so, or was there an emotional element to it?
  • If you’re on a losing streak, try to see whether you’re just trying to “get rich quick”, instead of entering and exiting a trade in a systematic way
  • Are you accounting for slippage and trading fees when setting your stop-losses?
  • Are you using the right leverage?
  • Are you overtrading? Even if you’re a day-trader, making 5-10 trades per day is probably too much and you will get destroyed by trade fees
  • Are you proactive when analysing the trades and polishing your strategy? Avoid making the same mistake and thinking that “it was a good trade” in hindsight. If a pattern looks good on paper but fails in action – consider stopping using it

Also, it is a good practice to use a trading journal – novice traders who start making notes about their trades to conduct periodic analysis very often report improved results.

Last but not least, make sure you’re using the right trading software. That’s where GoodCrypto really shines – it is probably the best trading platform for cryptocurrency on mobile devices, allowing you to access 20+ exchanges, set custom alerts, take advantage of advanced order-types available on all supported exchanges and use custom alerts!

Source: https://goodcrypto.app

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