Early Investing

Is the Worst Over?

Is the Worst Over?
By Adam Sharp
Date April 10, 2020
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If you looked only at the stock market, you’d think things were going pretty well in the fight against COVID-19.

After falling more than 30% in just a few weeks, the S&P 500 has rallied back 23%. And it’s officially exited bear market territory.

On the medical front, quarantines appear to be working to flatten the curve. Heroic efforts are underway to create a vaccine. But a successful one is still at least six months to a year away.

Unfortunately, most of the real economy remains frozen… And a record 10 million Americans have filed unemployment claims in the last two weeks. Morgan Stanley and Goldman Sachs expect gross domestic product to contract by as much as 30% in the second quarter.

As a result, earnings are basically impossible to predict at this point.

Eye of the Storm?

I’m not buying this miraculous rally in stocks. I suspect the rally is mostly a product of the Fed lowering interest rates to zero and the government shoveling trillions of dollars’ worth of stimulus into the economy. I’m not convinced this rally has staying power.

I suppose it’s possible that we’re headed to new all-time highs. But I highly doubt it. The idea that the stock market could reach all-time highs during a time like this seems absolutely ludicrous on its face. But who knows? These are unprecedented times, so we can’t rule anything out.

However, we have to weigh the possibility of stocks hitting new highs versus the worst-case scenario (WCS). My WCS is that stock indexes fall more than 50% from here, as I outlined back on March 6. This scenario seems more likely than the one where the market heads to new highs.

There is simply too much debt in the corporate system. We must eventually deal with this.

So no, I don’t think we’ve seen the worst of this crisis. It feels like we’re in the eye of the storm. Things are calm right now. But I suspect they will get volatile soon.

Generally speaking, stocks remain a risky place to be. It’s more important than ever to diversify into alternative assets. As I’ve written about extensively lately, I believe owning gold is critically important. It remains my favorite safe haven asset.

Bitcoin has made a strong showing lately. If you’re okay with significant risk, it offers unmatched potential upside. As I wrote last week, bitcoin was literally made for times like these. The bullish case for bitcoin is essentially the same as the case for gold. But crypto will likely be far more volatile for the foreseeable future.

As always, I continue to seek out attractive startup investments. We are entering what is certain to be an extremely disruptive period. Many large corporations will likely struggle or fail. And the startups that do well during this time have a rare opportunity to grab huge chunks of market share while incumbents are weakened or absent.

Bootstrapped or lean startups are especially attractive during times like these. It will become more difficult to raise funding if the economy continues to struggle, so cash efficiency is paramount.

Startups are high-risk, high-reward investments. And in a difficult environment, both the risk and the reward are magnified. So if you’re going to invest in startups now, you need to spread your bets out across at least 10 to 20 companies.

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