The bubble has burst for the pandemic winners

Chris Salih 07/02/22 in Strategy

Having been the stock market darlings for almost two years, the pandemic ‘winners’ have had a torrid few months. Firms such as Zoom (teleconferencing) and Teledoc (virtual medicine) have seen their share prices fall around 75% from their peak, while home exercise bike specialist Peloton’s share price is down 85%. Even MRNA vaccine maker Moderna hasn’t been immune – its share price has fallen 64%, while Ocado is down about 50%*.

While the likes of Amazon and Microsoft have been dealt softer blows (they are down around 22% and 10% respectively*), it’s fair to say that many of these stay-at-home heroes have come crashing down to earth. Facebook (or Meta as it is now known), experienced the biggest one-day loss for a US company in history last week, when its shares fell by 25% in 24 hours knocking some $230 billion off the company’s value.

Some people think this is the start of a wider stock market crash. Veteran hedge fund manager Jeremy Grantham, for example, believes the US is in the midst of its fourth ‘super bubble’ of the past 100 years – the other three being in 1929, 2000 and 2008.

In a note published in January, Jeremy Grantham said that the S&P 500 index could fall almost 50% from its recent highs as it reverts to its historic average. The note criticised the US central bank, the Federal Reserve, for facilitating three major bubbles in the last quarter century and said that the US was also experiencing bubbles in bonds, housing, and commodities.

“If valuations across all of these asset classes return even two thirds of the way back to historical norms, total wealth losses will be on the order of $35tn in the US alone,” he wrote.

So how to invest through what is likely to be a volatile year?

Selling shares and trying to reorganise a portfolio in the midst of a period of turbulence is rarely a good idea as it just crystallizes losses.

If you are investing for the long term, it is usually a better idea to simply make sure you have a diversified portfolio and maybe use stock market falls as an opportunity to top up your holdings at cheaper prices.

Bear markets are typically a fantastic opportunity to pick up shares on the cheap – as demonstrated in March 2020, when stock markets rallied after the initial covid-crash.

“My view is that deflationary forces will ultimately reassert themselves and that the Federal Reserve and the Bank of England will be forced to stop hiking rates,” commented James Yardley, senior research analyst at FundCalibre. “If this happens, growth stocks will do well again.

“In terms of funds, Baillie Gifford Global Discovery and Baillie Gifford American are both going through a difficult period as they have a lot of exposure to these types of companies. But historically that’s been the perfect time to add to these funds.

AXA Framlington Global Technology is another option, which has more exposure to big tech names like Apple and Meta, but it still has a good chunk of mid cap names as well, which perhaps have more room to grow.

“However, if you think the sell-off is just getting started and you want to invest in other areas, Schroder Global Recovery and Ninety One Global Special Situations are both funds with a lot of exposure to value sectors, which could do well if inflations remains sticky and covid begins to subside.”

*Source: Google Finance, from peak to 7 February 2022

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