Connecting the Dots with the Stock Market’s Disconnect
Throughout this pandemic, the stock market, at times, may seem to deviate from reality. At a time where businesses are closed, unemployment is at record highs, and vaccines are still in the future, the stock market has reflected an optimism that few share. So, who’s crazy – you or the stock market? Believe it or not, it’s neither.
So why is Wall Street looking at this current situation so optimistically?
There are a number of reasons:
- The major indexes look at a select few large companies. The Dow looks at just 30 companies and although the S&P 500 is more diverse, it is mostly influenced largely by companies in the technology sector. Most of these companies have fared well so far (Amazon, Microsoft, Home Depot, Apple, etc) and so it would stand to reason that the index would rise during this time.
- Wall Street only looks at companies that issue stocks – many of the small businesses that have been affected by the COVID-19 pandemic do not. Therefore, the impact on these small businesses are not factored into the market.
- Investors really have nowhere else to go with their money. Interest rates on bonds, CDs and savings accounts are very low and therefore not competitive at all.
- Investors are still experiencing “FOMO” – or “fear of missing out”. As stated earlier, large companies, like Microsoft, Google, Apple and Amazon, have done well through the pandemic and many investors still see them as buying opportunities.
- Although there are many factors that affect the overall economy, such as unemployment, rising cost of essentials, and business closures, the Federal Government has tried to compensate. Congress has passed stimulus packages that have pumped money into the economy. This influx of money has helped to calm investors.
- The Federal Reserve could be the largest component behind the market sentiment. They have announced that the Central Bank will offer support to the economy for as long as necessary – by maintaining unprecedented low interest rates and buying corporate and government bonds of various risk levels – basically covering corporate debt with disregard to risk. When businesses can’t lose, investors can usually win.
- And lastly, the market looks roughly six months ahead. Investors are hopeful that the economic recovery will be swift as more states begin to re-open and that a vaccine will be available within that time frame.
Whether you agree or disagree, the stock market is just doing what the market has always done – making an educated guess about the future. The best way to handle the fluctuations with the market is through diversification and establishing a portfolio that matches your risk tolerance. Have questions? The WealthEdge® Investment Team is here to help.