There is an old saying on Wall Street, “The stock market is not the economy and the economy is not the stock market.” We all got a little taste of that this past quarter when we saw a negative -4.8% GDP in the first quarter and predictions of negative -30% to -50% GDP for the second quarter. We saw record unemployment, sharp drops in retail sales, manufacturing data, and really just about any economic indicator. How is it even possible that we would see a gain of nearly 20% in the S&P 500 and gains of 17.8% and 30.6% for the Dow and NASDAQ, respectively?
A Forward-Looking Indicator
The simple answer is that the Stock Market is a forward-looking indicator. What is happening in the “now” is far less important than what is about to happen and what is expected to happen in the next 12 to 18 months. In fact, the drastic drop that we saw in the first quarter started in late February. This was well in advance of any significant increase in Coronavirus cases and certainly in advance of any notion that the economy would shut down about a month later. The drop in the market was fast and furious and there was little anyone could do to stop it. Then, just as world economies were grinding to a halt, the market reversed course and as we closed the 2nd quarter ninety days later, the losses are all but erased.
There is no doubt that the market priced in something very severe earlier this year and rightfully so. However, as the economy “shut down” we learned that many parts of the economy thrived. We all adjusted our shopping habits, eating habits, and entertainment habits. We shifted from buying things in person to buying things online. We started eating most of our meals at home versus most of our meals on the road. We suddenly had free time which led to fixing up the yard and fixing up the house. All these changes in habits led to increased demand for online goods. Add in the fact that the government added a $3 Trillion stimulus plan to the equation and suddenly many of the stocks that cater to these types of buying habits started to reverse course and many now sit at all-time highs.
The combination of the stimulus and the resurgence in some key parts of the economy led to a quick and massive reversal of the jobs market with the economy adding 2.5 million jobs in May. This was followed by an additional 4.8 million jobs in June. Now, we have a market that is rebounding from a correction that went down too much and there is a focus on a continuation of the rebound through the rest of 2020 and 2021.
With all of this good news being priced in, we again find ourselves in a situation with extremely low-interest rates, a market that is historically on the expensive side of things, and an investing community counting on revenue and earnings growth in the next 12 to 24 months. There is no denying that the economy is roaring back, but questions remain about the sustainability of the rebound in the face of the coronavirus that seems to be hanging around and not going away any time soon. Needless to say, the market volatility will likely be here for a while as we continue to digest the daily virus data, the economic data, and the company earnings data in the weeks and months to come.
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