The markets are not the economy
Updated: Jun 17, 2020
There seems to be a disconnect between the stock market and the economy. In mid-March, fear and panic set in over a little-known virus wreaking havoc on life as we know it. As more data was revealed about measures to stay home, the closing of store-front businesses, social distancing, and a flattening of the curve, pessimism over the economy set in sharply. We saw corresponding sharp decreases in the stock market, so it’s easy to see how the economy and the markets can appear bound together.
This sharp decrease in the market, however, did not occur as a result of earnings reports, job/employment data, interest rates, foreclosure, defaults, decreased cash flow, or anything else for that matter - quarterly reports were still a month away. The reason the stock market decreased so sharply was that people’s perception of value had decreased sharply.
It was the mere anticipation of the economy’s downfall that caused the stock market to decline, not the businesses represented within the markets themselves. The stock market is like any other market – the value of what is being offered in ny market is a direct function of what someone is willing to pay.
As I write this today, the economic news over the past 8 weeks has not been positive – earnings reports, job/employment data, interest rates, foreclosure, defaults, decreased cash flow… The one positive headline seems to be that the markets continue to trend upward (?), despite the downward economic news. The reason for this upward market trend is the same as what I outlined above: it is a result of people’s perception of value – optimism in perceiving that life will go on, businesses will adjust, a vaccine will be created and the economy will recover.
Here is a recent graph of the S&P 500 over the past 5 years which show these sharp changes in sentiment:
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For those interested, I've also included a few articles below which outline this much more saliently.
The markets may not be the economy… but we may still have a long way to go for both to normalize.
The take-home here is to ensure you have a framework for long-term investing, and to ensure your emotions (excitement when markets are up, fear when markets are down) don’t cloud your judgment in sticking to that framework.
If you have any questions about your financial plan, would like our opinion on what this current financial landscape means for long-term investors, or would like a refresh on the framework we have in place for times like these, please never hesitate to reach out.
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Be well and be safe,