Stock Market – What’s Going On?
Happy unofficial start of the summer everyone. Summer is by far my favorite season. This year’s Memorial Day, summer, backyard BBQs, and hangouts with friends and family will be unlike any other it seems. However, there’ll still be plenty to enjoy in its own unique way. I grew up at the Jersey Shore and whenever I visit, it brings back tons of nostalgic memories.
Of course, I intend to continue that tradition and make many more Jersey Shore memories. What are your modified summer plans?
The million-dollar question everyone’s asking is: Why in the world is the stock market holding up so well? Unemployment has hit record numbers, corporate profits are plummeting, and Covid cases aren’t screeching to a halt any time soon. The global stock market is down around 10% (give or take) as of the time this article was written. When I’ve spoken to clients recently, I say if you told me in January this pandemic would hit this bad, and the global fallout would be so far-reaching, I would gladly sign up for only having the markets down 10%. So, the question at hand is, what gives?
To answer as best as I can, I’ve bulleted the reasons below on why the market is holding up so well.
Why the Stock Market is Holding Up
- As our own Chief Investment Officer, Mike Horwath, says: “The markets are forward looking.” Thus, you can’t look at current data and say the markets should be as bad as the data suggests. In February/March, markets were very volatile and we saw steep declines, as investors were pricing in the bad economic data we see today. It’s being predicted that in 1-2 months the worst will be behind us.
- Markets hate uncertainty. Again, you hear me and our CIO both reference this a ton. Today, we have more clarity and, in general, we are starting to see our way out of this thing. There’s still plenty of uncertainty out there, but we’ve digested it and formulated a path forward. When the markets were on a free fall, we had no clue what was going to happen next.
- The world is starting to open up. I think it’s clear that this will be a work in progress, but the writing is on the wall. Even the worst hit states are talking about opening non-essential businesses (although if you saw me, you could argue salons are essential). We see Europe and China, who were weeks ahead of us in getting this pandemic, opening up much of their economy. It’s fair to assume we should be following in their optimistic footsteps.
- The assumption is a lot of these job losses will come back quickly. Many employees were furloughed with the expectation of coming back to work. This is a unique recession we’re in and one that seemingly is believed to have the ability to bounce back relatively quickly.
- The high-risk industries make up a small portion of GDP. Every job is important, no question about that. However, every job isn’t weighted equally. Only 10% of GDP is made up of high risk Covid industries. Compare that to half of the GDP being comprised by low risk Covid industries, such as big tech firms. As a matter of fact, the NASDAQ, which represents mostly tech companies, is actually up for the year (as I write this). 20% of the S&P weighting is made up of the top five tech stocks. Translation: the most influential businesses are still flourishing.
- FOMO (Fear of missing out). Ever get that feeling where you don’t want to be the only person not invited to the party? Well, we’ve already seen the greatest one week in the stock market in four decades, and that was a four-day holiday week. There are a lot of people out there that don’t want to miss the recovery completely. Thus, they are willing to hop back in for no other reason than they know they’ve bought at discount and don’t want to wait until it is too late.
- The government and the Fed intervened. We know we have a president in an election year who needs this economy to succeed. We also have a much smarter Fed that went through something similar a decade ago. Basically, there is a perception, and likely some form of reality, that these two entities will only let us fall so far before providing a sort of stopgap. From PPP loans, to bond purchases, to paycheck assistance, they are reaching deep into their toolbox to do whatever it takes to help brunt the force.
So, are we in the clear?
There are a lot of different ways this thing can play out. What I do feel very confident about is that we will get through it, although it will take some time. For now, try to do your best and enjoy the magic of summer. In the infamous words of my rock n’ roll hero Bruce Springsteen, “Cause down the shore everything’s alright.”