“Now I’ve learned, the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what’s going to happen next.
― Gilda Radner
I really enjoyed the quote above when I read it last week. We definitely have some of that delicious ambiguity swirling around us these days. It coincided with the swirl of conflicting data that seems to be pouring in on all fronts. What are we to make of a stock market that continues to rise in the face of record unemployment numbers? How can oil be worth less than nothing? How do we reconcile what is going on in the world which, quite honestly, seems to defy explanation sometimes? Let’s tackle these issues in this week’s “Inside Look at Building Towards Wealth”.
The picture this week is just me and my son. I didn’t have anything else I wanted to use this week and he is just so stinking cute and the best thing going on in my life right now.
Here is what we know as fact:
- 26 million have filed for unemployment in the last 5 weeks.
- Economic numbers across the board are down sharply.
- Since the S&P 500 hit its most recent bottom of 2237 on March 20th, the market is up, close to 28%, as of its close yesterday.
Given the information above, how do we reconcile what seems to be conflicting information? Following, are a few of the reasons that I believe are contributing to this seeming “disconnect”:
-The market is not the economy: There is no rule written that says the market must reflect what we are seeing out of our windows. The information we are seeing come in is economic data. While this certainly has an effect on business, it will affect some areas much differently than others. We certainly could see the economic date get worse and pull the market down with it, but that is not a certainty. If you think this time is unique, consider that the stock market rose during both World War 1 & 2. Those may have been the most uncertain times in the last 150 years.
-Forward-looking vs backward-looking: The economic data that we see looks at what has happened (backward-looking) while the stock market is looking at what will happen in the future (forward-looking). There certainly could be bad news that comes out which will dim the long-term outlook significantly. A second wave of COVID 19, additional economic shocks, and delays in treatment or vaccine could all hinder what the future looks like. I believe that we will eventually recover from this, the real question is, how will the timeline for such a recovery look? If we believe the future looks better than the present, then the market reasonably should price that in. We do have an issue on whether that recovery is equal for all industries.
That takes us to our next point.
-What really makes up the stock market: The S&P 500 is often quoted as “the stock market”. However, it is actually only a portion of the entire global stock market, although, it is an extremely important part. The S&P 500 is a market-weighted index. That just means, the companies that are worth more make up a bigger portion of the index. As of today, the top 5 companies are Microsoft, Apple, Amazon, Facebook, and Alphabet (Google’s parent company). Those 5 companies make up approximately 20% of the S&P500, as seen here. If those companies continue to do well and you can tell me how much time and money you have spent on Facebook and Amazon alone these past few weeks, then the S&P 500 will do better than the economy as a whole.
You do have many retailers like Nordstrom and The Gap that are down 60%, casinos like Wynn and MGM that are also down over 50%, and a host of other industries are doing very poorly at the moment. There are portions of the market that are doing every bit as bad as you could imagine, it’s just not so many of them, at least as of now that the entire market is plunging.
-The fiscal stimulus and fed liquidity policies are having a great effect: I will stay out of the argument of how these programs are being run and the possible long-term effects at the moment. It can be safely said that the government has acted more swiftly and with greater resources than previous economic shocks. There is little doubt that this is having a positive effect on the long-term outlook of Wall Street towards publicly traded companies.
-Interest Rates: Can you believe as recently as October of 1987, that the 10-year Treasury bond had a yield of over 10%? In late February, that was down to 1.6% and today it is under 1%. Investable assets have to go somewhere and there just isn’t much upside to investing ion bonds that pay you less than $1000 for every $100,000 you are investing. Pension funds, endowments, and sovereign wealth funds, among others, all have to put their money to work in someplace.
Do I think that low-interest rates can keep a market going forever? Absolutely not. It certainly can help buoy a market for a while because there are still people, and often it is those institutional investors with the most money that need to stay invested for the long-term. The alternative for them is not viable for the long-term.
All this is to say, we really don’t know what is going to happen in the short-term. There is a lot that does not seem to make sense these days. If we are long-term in our outlook, then remain focused on those long-term returns are and try to tune out the short-term noise. There are a near-infinite number of scenarios that could play out in the future. If we act like we know which one it will be now, we could be exactly right or exactly wrong. Being exactly wrong is how we end up broke. If we prepare for any eventuality, we can keep ourselves from being catastrophically wrong and in extreme financial pain.
I hope this was helpful for everyone and provided some clarity on why what we see with our eyes can often conflict with what is going on in the markets.
Stay safe and keep doing your part to bend the curve!