The COVID-19 pandemic changed the way we look at the world. It changed our daily routines. It changed our expectations and what we consider “normal.” But it did not change the way things work. COVID’s impact on stock markets was unprecedented. Markets plunged faster than expected. Markets recovered faster than expected. As the economy adapted to the fallout brought by the pandemic, markets behaved in a way that was different from what was expected.
While much of what we knew about the stock market was disrupted by COVID-19, the basic mechanics of the market — the way it works — did not change. Stock markets are ruled by supply and demand. Before COVID, during COVID, and in the “new normal” that COVID has created, the markets’ movements are determined by supply and demand.
Understanding Supply and Demand
Once you understand the undisruptable nature of supply and demand, one of the most advantageous things you can do for your wealth is sit down and ruminate on what changes and impacts on a global scale will occur from any specific event, however large or small. From there, plan on a macro level how to benefit from those changes.
In some cases, an event will affect the availability of an item. Supply can be disrupted for many reasons, from severe weather to geopolitical volatility to labor unrest. When supply is reduced, and demand remains constant, markets are affected.
In other cases, an event will affect the demand for an item. Demand may grow due to a trend, a new need, or a change in the seasons. Whatever the case, markets are affected if an increase in supply does not meet the increase in demand.
To leverage and benefit from fluctuations in supply and demand, investors must develop a sense of how events impact supply and demand and how the market will respond. They must make it their practice to consider the potential ramifications of events.
Learning From Events in Ukraine
Before I look at a few examples of how supply and demand played out in COVID, let’s look at something that is playing out now: Russia’s invasion of Ukraine.
One thing that is important to consider as we sit down and ruminate on the global impacts that the invasion may cause is that Ukraine produces approximately 30 percent to 40 percent of the world’s corn. As Russian troops move into Ukraine and begin to decimate the land, they will be destroying crops. As a result, there will be a massive shortage in world corn supply.
In a situation like this, where an event causes a shortage in the supply of a globally traded commodity and at the same time demand stays the same, a price increase is bound to happen. How can we take advantage of a situation like this? We can invest in corn futures, corn commodities, or products made from corn like whiskey or bourbon, specifically those made in the United States or coming out of Kentucky.
How did the market reward those who took the time to think through the impact that this time of malice and negative intent from Russian toward Ukraine would have on markets? Had they invested in corn, they would have benefited from a surge of more than 20 percent in corn prices, which is a massive run-up on corn. Once again, the market is ruled by supply and demand.
Learning From COVID
The supply chain stranglehold resulting from COVID-19 has been one of the most talked-about impacts of the pandemic. It is truly unprecedented. Some have said that global supply chains were already weak, and the pandemic exposed those weaknesses. Others point to restrictions imposed on manufacturing as a contributing factor. Regardless of what led to supply chain breakdowns, many industries found themselves struggling to provide consumers with a host of products in high demand due to the pandemic.
One example of how COVID influenced supply and demand is found in its impact on the electronics company Logitech. When the COVID pandemic sent many employees home from their workplaces, launching a work-from-home revolution, Logitech stock started a climb that eventually resulted in a 400 percent increase in value. Why? Because people needed Logitech cameras, Logitech mice, and Logitech keyboards for the home offices where they were now spending most of their work time.
While the demand for Logitech hardware was growing, the supply of those products was being reduced due to supply chain issues. As a result, Logitech’s stock value accelerated dramatically, as did the value of other companies that produce or sell products regularly needed in a home office, such as Wayfair.
COVID’s impact on Facebook provides another example of the value that investors can gain from stopping to think and ruminate on what impact events could have on markets. Facebook’s value went down when COVID started to take hold of the headlines. Those who were taking the time to sit down and spend a few minutes to a few hours analyzing COVID from a macro viewpoint might have asked questions like:
How will this impact me?
How will this impact my family?
How will this impact my kids?
What changes will this create in our daily routines?
How will my online patterns change?
How can we benefit from that change?
Those engaging in that type of analysis might have realized that everyone would be staying at home more due to the pandemic because of the stay-in-place orders that kept us from going to work and going to school. While at home, people would probably spend more time on their phones and their computers as they seek to replace the in-person connections they could no longer make with online connections. With that being the case, there is a strong likelihood that Facebook and apps like Instagram and WhatsApp — both of which are owned by Facebook — will increase their use.
How does this play into supply and demand? After all, Facebook is a software company that has no physical, tangible products to implement or sell. What increased demand will affect Facebook?
As the use of Facebook and the company’s other apps grew, so made the demand for advertising on those platforms. Companies that realized more people were spending time on the apps began competing for advertising space, which drove up the demand. So even though Facebook’s prices went down initially, those analyzing the situation and perceiving the increased demand for advertising space would suspect that the increase in future prices should be dramatic. Yet again, supply and demand led to the dramatic growth in stock value that Facebook experienced after COVID.
Understanding the Impact of Macro Events
While applying these concepts to investing requires some time and an understanding of how the world works, it does not require a genius-level IQ. The Facebook and Logitech examples reveal the power of paying attention to macro events while applying an understanding of simple high school economics. The concepts taught to you by your high school economics teacher — mine was Dr. Roger Strickland — are still extremely applicable.
What we need to do to continue to grow wealth even when macro events rock the world is to create the time to sit down and think — not meditate or medicate with Netflix or TV or alcohol or sports games — and truly obtain awareness and enlightenment and understanding regarding events that are happening on a day to day, week to week, or month to month basis in the world.
Perhaps the biggest challenge to attaining this level of awareness is taking our eyes off the market long enough to see what is going on in the world around us. The market is ruled by supply and demand. It reacts to the interplay of supply and demand. Getting a sense of what that reaction will look like requires tuning in to the demands playing out in our economy and the scenarios that might threaten the supply.
COVID may have changed the way we look at the world. It may have changed our daily routines. It may have changed our expectations and the things that we consider “normal.” But it did not change the basic mechanics that determine how the world works. Events do not change the rules of the market; they simply set the market in motion by increasing demand, reducing supply, or both. We can leverage those events to better our overall financial outlook and thus increase our capability for a massive and beautiful impact on this world.
I have found that the experience investors had during COVID has led to feelings of fear or feelings of optimism. I continue to believe that the right feeling is optimism. After all, the core of investing is having an optimistic outlook for growing financial wealth.