Is There a Disconnect Between the Stock Market and the Economy?
Author: Matt Veenker, Director, Investment Management
Months into the COVID-19 pandemic we are all still experiencing the uncertainty of this time and seeing the devastating impacts that have been made to families, workers and the economy. Millions of people are unemployed and we’re still seeing virus cases six months after lockdowns began in March.
That all paints a grim picture, however, the stock market just reached new all-time highs in September. How can that be? There are many reasons for the market’s recent highs, but it helps to understand that stocks in general look to the future and are not focused on the past. It’s also important to note that at this time, not all stocks are performing well.
In general, stocks anticipate future growth in the economy. Stock prices usually reflect the earnings a company will generate months and years into the future. When COVID-19 forced a national lockdown in March, stocks had already anticipated economic data and corporate earnings would decline. The S&P 500 index declined almost 35% between the end of February and late March in reaction to this.
The market bottomed once the government and Federal Reserve stepped in to provide support for the economy. The rebound in stock prices has been in anticipation of better economic data and future corporate earnings. We are already seeing the economic data start to bounce back. Estimates for third quarter GDP are +30% on an annualized basis. Earnings are also expected to improve in coming quarters.
The virus has changed the economy in many ways. The economy was in relatively good shape before the pandemic began, which hopefully means there will be a fairly quick recovery period. Fortunately, consumers are still spending but have changed what they are spending money on. For example, housing is doing very well right now with record low interest rates and pent-up demand. Home improvement stores are performing well as people are spending more time in their homes and realizing they need updates. Technology has also become a critical need as many work remotely and need to communicate in different ways.
On the other hand, the virus is having negative effects on other industries. While grocery sales are way up, many restaurants are temporarily or permanently closed. According to McKinsey & Company, casual and fine-dining restaurants have seen their revenues decline by as much as 85%. Travel is another industry that is way down, and airlines and cruise lines are suffering as a result. On a positive note, these industries are likely to see boom times when the virus recedes. People still want to travel to see family and explore new places.
As the economy continues to recover, there will likely be opportunities to invest in solid, well-run companies at good prices. Some parts of the market are getting expensive, but there are plenty of opportunities to find value. Your financial advisor can help you best position your portfolio in today’s market environment to help meet your financial goals.
About the Author
As a Director of Investment Management, Matt helps clients create investment portfolios to secure their dreams and goals. He is dedicated to guiding his clients toward sound financial decisions and lends his experience to help customers build a prosperous future.
This material is provided for informational purposes only. It does not constitute legal, tax, accounting, investment or other professional advice. All expressions of opinion are subject to change without notice in reaction to changing market, economic or political conditions. Information contained herein from third parties is obtained from what are considered reliable sources. However, although it is intended to be accurate, its accuracy, completeness or reliability cannot be guaranteed. Linking to any third party materials in no way implies an endorsement or affiliation of any kind with any third party. This material was created as of the date indicated and reflects the author’s views as of that date. Neither the publisher nor any other party assumes any liability for loss or damage due to reliance on this material.
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