Human resilience: the lessons we took from the pandemic

Human resilience in the face of a public health risk and economic disaster does not mean that people haven't experienced difficulty or anguish. The pain, sadness, and uncertainty of what awaits us were common denominators. These adversities in their lives led people to adopt a resilient attitude that allowed to carry out realistic plans and make complex decisions.

The explosion of innovative dynamics and technological knowledge in the face of such a challenge has been extraordinary. Science brought new vaccines in record time, with innovative technology opening new paths for health. The recombinant DNA technology in the immunisers developed by Pfizer in collaboration with BioNTech and Moderna is clearly the most innovative.

Human resilience is undoubtedly the takeaway of the year

In the context of financial markets, we are convinced that the emotions, feelings and cultural factors intrinsic to each society and generation have influenced the prices of financial assets in the markets throughout the pandemic, leading to a distortion between prices in the markets versus the real economy.

Emotions dominated the markets, which saw three phases. The first was the panic that caused the oil market to crash last year when the price for a barrel of oil reached negative values due to skyrocketing storage costs. This resulted in a price distortion in April 2020. 

As soon as people acquired information and compiled strategies to deal with the pandemic, oil prices stabilised at around $30 a barrel in the first phase. As more certainty emerged about how to deal with the pandemic and keep the economy running with social distancing restrictions, oil prices returned to pre-pandemic levels of around $60. More than anything, the initial movement in oil prices was the emotional action of panic.

The markets soon regained confidence thanks to the arrival of vaccines, on the one hand, and central banks and political powers, on the other, who signalled to markets that they were ready to withstand the economic and social crashes. After fear and panic, greed seems to be taking over the financial markets, a sign of history repeating itself.

The price correction demonstrated between March and May 2020 attracted many new investors to the markets. Furthermore, reducing the cost of money (interest rates went to zero) worked like a catapult in the stock and bond markets. In markets less liquid than cryptocurrencies, this dynamic was more aggressive and accentuated. For instance, in the case of Tesla, the question emerges of whether new shareholders are or are not paying a very high premium in relation to the electric car sales expectations for the company.

High volatility means high uncertainty in the markets

Volatility remains very high. The Nasdaq 100 Volatility Index, which stood at 15 points in March 2019, rose to 45 points at the beginning of the pandemic. Today, it's trading at 30 points. If we analyse the first days of March 2020, we see a 9.48% drop on Tuesday, an increase of 12.25% the day before, and a 10.44% fall the Friday before that. In March 2021, the Nasdaq 100 is seeing a yoyo effect, although its changes this month are only -0.89%.

This tells that investors are taking short-term positions with high turnover, despite high volatility. The market is mostly in a sideways trend, waiting for a new event or confirmation.

Interest rates and the issuance of new Treasury bonds

The interest rates on US Treasury bonds generally give us clues of what's to come. The Treasury started selling bonds this week, a sign of the first significant struggle the Treasury faces to finance the $1.9 trillion stimulus package recently passed by Congress.

The CSI 300 index corrects for four days

In China, signs that the government may reduce the pace of monetary and fiscal stimulus have led the market to correct in the past four days, primarily due to the rapid increase in corporate debt in that country. This indicates that the deleveraging of the economy should be one of the year's priorities.

OECD reviews global growth forecast

With optimism about vaccination programmes, approval of the stimulus package in the United States and the possible resumption of economic activity globally, the OECD has revised its growth forecast from 4.2% in November 2020 to 5.6% in 2021.

What's next?

Some uncertainties in the financial markets are still to come. For one, we just rounded the corner on reopening the economy globally. However, financial markets are continuing to see very high volatility, which increases investment risks. Issuing Treasury bills and the inflationary pressure on economies, combined with stock and bond markets being close to highs, are certainly determining factors as to whether the upward trend continues or a correction begins.

Here's a way to position. For short-term positions, reduce exposure to reduce risk. Because fundamentals are distorted, essentially adopt a technical strategy with a preference for positions in liquid assets, such as indices and large caps stocks. Also, be emotionally prepared for any sudden movement in the markets, be it a correction or a rally.

Investors should pay attention to inflation data and how interest rates on US Treasury bonds play out because these will dictate the near-term trend.