This year has been a rough year for many standard parts of our economy. Certain sectors have been hit hard along with certain types of individuals. Regardless the damage is certainly real. 1https://www.forbes.com/sites/sergeiklebnikov/2020/03/21/just-how-bad-is-it-heres-the-economic-damage-the-coronavirus-will-cause-according-to-major-banks/?sh=37ed530a53d5 This has been paired with two other contrasting facts. The first is that the government in many cases has handed out more money to people 2https://home.treasury.gov/policy-issues/cares and the second is that the stock market and other asset trading outlets have soared 3 Taken 02/01/2021 https://markets.businessinsider.com/index/dow_jones?op=1 4 Taken 02/01/2021 https://markets.businessinsider.com/index/s&p_500?op=1 . For some this has been great and seen them make great returns. Yet how natural this is and other elements of this surge should leave even those hoping for more nervous and concerned.
Media Loves A Sale
Reporting is to be expected and is useful to help make choices with your money. Reviews allow customers to have more faith in a product that they purchase and limit the harm that can come from a bad pick. Reporting on large increases especially with so much bad news during 2020 is something that also should have been expected. However, reading the news around this surge it feels different from honest reporting. Stories now are pushing people to invest in the market and pointing to the money that has been earned by others. Once again this is not wrong but seems irresponsible when FOMO (Fear of Missing Out) and the basic rule of past outcomes due to predict future results are factored in. Encourage people to invest for the right reasons is fine. Yet diminishing risks is irresponsible especially when it is targeted at people who have lost work.
Even if the market was to keep going up for some time getting people into investing by downplaying risk sets them on the wrong path. It also hurts the wider markets as volatility will only increase. People choosing to buy in now is fine but the fact that there is so much media pressure with limited justification is something that should be very concerning even for those who want to get in. Evidence based thinking and risk management are cornerstones to investment and pushing people into it without noting this down is a disaster that is waiting to happen.
Boom Backed On Credit?
A concern detail of the current booms is the possible increase in trades with leverage. 5 https://dynamicbusiness.com.au/topics/news/leverage-crypto-traders-lose-over-us13-billion-in-2020.html . This can be paired with the growth of zero commission trading sites that often have easy access to leverage. A detailed breakdown of the industries money maker is hard to come by. Banks have grown more hesitant to lend money for stock purchases however this has been taken up by many of the exchanges themselves. Due to the conflict of interest, little information comes out about these elements of these markets. However, often investors appear to be losing money when trading on leverage (credit) 6https://stockstotrade.com/robinhood-trading-with-leverage/ . It is riskier than using money that you have full possession of.
Paired with the above downplaying of risks people may take out loans to try and get large returns that put them back on their feet after the rough year that was 2020. The zero commission is being powered by the money that is made lending out money to other investors. The long term sustainability of this system on a large scale remains unknown. Some have claimed that this will reduce risk due to people not wanting to lose money that they have taken loans on and this will moderate the market. No evidence for this belief has been given and using historical evidence of the 1920 and dotcom boom just because people take out money in loans does not mean that the market is safe from crashing. This belief nonsense and not backed by evidence of past market cycles.
The exact fate of the market is something much more complicated than one news story can show. Different theories exist about how to make money or even just work out what is going on. If these come from an honest place and are non-predatory these great resources. Yet the motivations of some seem to be much more distorted.