When Blood Runs in (Wall) Street...

Lessons from the COVID Crash for Today’s Stocks Bubble

Earlier this week, I wrote about how the S&P 500 recently crossed 6,000—the highest it’s ever been in the stock market’s history.

Lopsided and top-heavy, with the 'Magnificent 7' dominating and fundamentals out of sight, mainstream stocks look ripe for a correction.

Sure, the S&P 500 might keep climbing a bit longer—thanks to the FOMO factor—but if you look at the five most famous stock market crashes— the Wall Street Crash of 1929, 1987’s Black Monday, the 2000 Dot-Com Bubble burst, the 2008-2009 Global Financial Crisis, and the COVID Crash of 2020—every single one occurred when the stock market was at or near its all-time high.

Now, I’m not bringing this up just to warn you about the perils of investing in overvalued stocks—I already talked about that in my last essay. What I want to draw attention to is something that might seem obvious at first but is rarely acted upon: market crashes can be massive money-making opportunities (with the caveat that you need the courage to back up the truck while everyone else is running for the hills).

The COVID Crash of March 2020 offers a perfect case study. As a flu-like virus spread—trivial for most except the very old or very sick—panic gripped the markets. The S&P 500 plummeted 34% from its February peak to its March low, one of the sharpest drops in history.

And as often happens in these situations, mainstream stocks weren’t the only casualties. The financial carnage spread across all markets. REITs plummeted over 40%. Copper, often seen as a barometer of economic health, dropped nearly 30%. Corn futures fell 20%. Oil prices went negative for the first time in history. Bitcoin crashed over 50% in a single day.

Even gold and silver weren't spared in the initial panic, triggering double-digit losses in precious metals mining stocks.

Seizing Opportunity in the Chaos

Those were nerve-wracking times, no doubt. But, as I mentioned, mainstream stocks weren’t the only ones to sell off—many other things dropped even more. That created a golden opportunity to scoop up some top-notch assets at fire-sale prices.

What happened next?

The S&P 500 took five months to recover before resuming its climb. But other assets rebounded much faster and with greater strength. Gold stocks, for example, bounced back in barely a month. By July, they were up nearly 120% from their March 2020 lows. Just look at the graph below.

The point is, whether it was junior gold mining stocks at a 70-80% discount, physical silver under $12 per ounce, Bitcoin at $5,000, or anything else, those who bought when everyone else panicked made a killing. For many, the 2020 COVID-19 crash was the buying opportunity of a lifetime.

I bet many of you know exactly what I’m talking about. Almost everything did well after the March 2020 crash, and some things did spectacularly well.

But here’s the thing. Profiting from the March-2020 crash was only "easy" in hindsight. Many people chickened out at the moment of truth, when share prices went into freefall. Others wanted to act but lacked the liquidity to move.

History May Not Repeat, But It Often Rhymes

Today’s market environment feels eerily familiar, and for good reason—nothing has fundamentally changed. Mainstream stocks are still overpriced—more than they have been in a long time, in fact. Recession fears loom large, and the world remains as interconnected—and fragile—as ever, vulnerable to black swan events like COVID-19 that can upend everything (through the knee-jerk, heavy-handed responses of governments).

It feels like all it would take is the faintest trigger—like the snap of an air gun in a crowded theater—to send everyone rushing for the exits again. I don't know what that trigger might be: another pandemic, a systemic financial crisis overwhelming our fragile system, or something entirely unexpected. Whatever it is, it will create major buying opportunities.

Now, I’m not talking about the S&P 500—it would need an exceptionally deep discount to align with fundamentals before it grabs our attention. But being ready to act when opportunities arise elsewhere (after that trigger eventually goes off) could pay off big time.

Regards,

Lau Vegys