People Are Losing Jobs, Businesses Are Shutting Down But Stock Market Is Surging. Why?
In the past few months, we all heard the news of tons of people losing their jobs and a number of businesses shutting down. The situation is such that one in four workers in America have filed for unemployment claim because of coronavirus and almost half of the households are saying that they have lost income.
But despite all this news, the stock market is ticking higher almost every week, why?. Although, stocks are still down by about 11 % from starting of February, but since crashing spectacularly in mid of March, the movement of the stock market is in the upward direction.
So what changed?. Are we not seeing the real picture?. Did Wall Street doesn't have any idea about how bad things are right now?.
Stock Market Is Good In Bad Times
The stock market is out of sync with the reality of the world right now and it's not really that surprising. Here are a few reasons, why the stock market can trend high, even though the world economy is in distress.
A good or bad day for the stock market usually measured by the ups and downs of the stock indexes like NASDAQ, S&P 500, Dow Jones Industrial Average, etc. They are behind the tracking of stock prices for some of the biggest companies in the United States Of America. But the businesses like a local cafe, local child's preschool, local hairdresser, etc are not represented in a stock index. And these are the kind of businesses that are struggling most right now. According to the National Bureau Of Economic Research report published in April, close to 100k small local businesses are already shut down permanently because of the coronavirus pandemic. Small businesses have reduced the number of their employees by almost 40% since early January. Usually, small businesses don't have large cash reserves, therefore it's very difficult for them to survive even a month or two with restricted to no income scenarios. All the big publicly traded companies often gain when their smaller competitors are shutdown because now as a consumer you have limited options and you will end up buying from them eventually.
So, the truth is that the stock market does not represent where we are at. It represents what investors think will happen.
As an investor, you buy stocks in a company if you think it can earn money for you. You wouldn't care if there are some intermediate lapses if you think better times are ahead in the future. Similarly, you sell stocks if you believe that it will lose money. You will not care how great profit margins were in the past if you think there is no more scope of profiting. The same logic can be applied to the entire stock market, upward-trending stock prices show that investors believe that companies can make more money in the future.
“The stock market is a leading economic indicator that attempts to tell us where we are going, not where we are or where we have been.” - Matt Elliot, Founder of Pulse Financial Planning
As we have seen that stocks plummeted back in February because investors panicked over the coronavirus pandemics and as coronavirus cases exploded all over the world and people losing their jobs left and right.
Now countries are reopening. New coronavirus cases are dropping in many parts of the world. A no of coronavirus vaccines are under trial which brings a lot of optimism. Therefore many investors believe that there will be a V-shaped recovery which means that the economy will rise back up after crashing.
But investors are not always right. Currently, experts also don't know where the coronavirus will take us over the next few months. So it's not like investors know how the thing will turn out. The question isn't just about what coronavirus will do but also about how the government all over the world will be going to tackle the situation.
Increased unemployment benefits under the CARES Act (USA) have shielded many of the newly jobless workforces from financial collapse, but those benefits will expire on July 31 and it's hard to believe that all those workforces will be back to work again by then. Many financial analysts believe that if the government is not able to provide more relief, the recovery will be more of W-shaped rather than V-shaped.
Big companies like Amazon, Facebook, Google, Apple & Microsoft makes about 20% of the S&P 500, which means that when stock prices for these companies rise, it can hide the problems of smaller companies whose stock prices are taking a beating. These big companies gained a lot from people staying at home because now we are spending more on online shopping and connecting with family, friends, and colleagues using machines instead of meeting them in real life. But the story is different for other sectors and stock prices of smaller companies are acting pretty slowly right now.
Also, the federal reserve made it easier for corporations to take on debt, and now suddenly even companies like Carnival & Boeing can issue bonds and get credit again which resulted in spikes of their stock prices. But the point to note is that just because a company can issue bonds again doesn't mean it's business is doing fine.
What Should You Do As An Investor?
Firstly understand that we are in uncharted territory at the moment and the majority of the world doesn't know how this pandemic is going to unfold in the near future, therefore let's not invest as if we have done up till now.
The best thing you can do as an investor is to budget an amount for investing each month, irrespective of what the stock market is going through. Right now nobody really knows how the recovery is going to look like.
Another important thing to remember is that, don't invest money in stock market that you will need in the next three to four years. Also, try to ignore the daily fluctuations of your investments in the stock market.
In other words, don't worry about the fluctuation of your investment portfolio in the short term because the short term is usually difficult to predict. Put you investment for the long term and stick to the plan through up and down.
The world is at a difficult stage right now and we know it's very difficult to not panic and have a calm head but if we keep our calm and move cautiously and smartly, we will definitely come out of this much stronger and better.
We hope that you find this post helpful and interesting. Thank you so much for reading this post, please feel free to leave your feedback.