This is the second article I’m writing about euphoria in the markets within the year 2020. I wrote the article, “Emotional state of observance: Euphoria” earlier in the year to document the phenomena as I saw it occurring.

I’m mainly writing this article as a continuation of the thought from the first article but with a different perspective when government officials and people who seem to be in the know are beginning to question the dynamics of the market as of December 2020.

Major red flags by prominent people:

“”One thing we don’t regulate directly…is euphoria and we’re seeing some euphoria here,” he added.” from the article,

“SEC chief Jay Clayton says he is nervously eyeing retail-driven euphoria in the stock market” by Emily Graffeo

““It’s all about that enthusiasm for stocks that should make somebody that is bullish call a time out.”” from the article,

“Market sentiment is at dot-com-bubble euphoria levels due to vaccine optimism, investor Peter Boockvar warns” by

Stephanie Landsman

 

These are just two basic examples of major prominent people who seem to be in the know calling out the irrational behaviors driving market prices. You can find countless other examples all over the internet if you just google euphoria and stock market.

 

I think I also saw an article claiming that Jim Cramer, whom I see to be an entertainer and a market speculator, to understand that the market is “overpriced.”

 

This is the second time in the year when the emotional state of euphoria can be fully understood and seen within the stock market.

 

Some people may say that the market was pricing in the vaccine but that statement is nothing more than speculative. Here’s a simple question to break the logical essence of that question: If the market was pricing in vaccines, then why is the market hitting all time highs instead of just adjusting/balancing the books? To me, these sort of statements make no sense whatsoever.

 

I think that we may be experiencing this irrational behavior in the market because of the Federal Reserve’s response to the whole corona virus pandemic and the economic turmoil the pandemic lead to. At first, those responses were swift and needed  but over time we can clearly see that it’s creating cheap money in the market but not helping anyone in the real economy.

 

To explain, the Fed’s quantitive easing (QE) policy is allowing banks to borrow money at very low interest rates (near zero) which allows them to make riskier bets, which is good to a point but never good for a prolonged period of time. The big banks never really needed this help from the Fed as stated by a bank executive at the WSJ documentary, “The Month Coronavirus Unraveled American Business | A WSJ Documentary.”

 

However, we can see that this policy when used over a prolonged period of time leads to social inequality as it usually helps those that own assets but hurts those that do not. I would like to note that the indebted may be able to refinance their debts at lower interest rates with the Fed’s QE policy which may help some poor people but usually doesn’t make a significant difference. In sum, this policy is good for a shock therapy but bad as a prolonged solution.

This market euphoria taught me two things I knew but never truly understood:

1. Hold onto good assets you own for the long term and try not to sell any good assets (even if the market offers more than the asset is worth) because you never know what’s going to happen.

 

Here’s an example: I bought Apple (AAPL) when it was 143 in the market fear of late 2018-early 2019 but sold in early 2020 before the split at 248 without actually realizing the true value of the company. The company was definitely worth more than what I sold it for (a mistake I’ve learned from: never sell out because you want to secure a profit). At the current moment with a 7 to 1 split of the stock in 2020, a before split stock is worth 923.16. We can see that I missed out on a huge potential gain if I only stuck around (though I think the current after-split price of 131.88 is extremely over priced).

 

2. Don’t try to speculate on market behavior because we can have a bubble that grows to unknown limits for unknown time periods. We will ever know how long and how high a bubble will last and go.

 

Here’s an example: Tesla’s (TSLA) market cap increased by 400% in 2020 which makes no sense when compared to how the actual company really didn’t change much from 2019. How could a company’s market cap change so much when the business remained essentially the same? Well that’s a lot of speculation and euphoria in the market driving up those prices. From this and other examples Iike it, I learned that market cap isn’t equal to the intrinsic value of any company and is more closely associated with what someone else will pay for it. This can lead us to the conclusion that an investor may be better off ignoring the market cap all together when trying to value a company’s intrinsic value and the sound price to pay for such a company based on the intrinsic value. 

 

So what does this all mean? What do I think the market will do next:

As JPM said “it will fluctuate.”

 

Thus, the best thing as an investor can do is manage their emotions (control the fear of missing out) and buy using dollar cost averaging methods into good assets selling at sound prices (even if that means not buying anything for years).