Over the past couple of weeks, I’ve found myself talking about the stock market as much as Covid-19. Why? In the first quarter of 2020, the economy was down 4.8% and we learned we are officially in a recession. The most recent unemployment data indicated 13% of the American workforce is out of a job. And chances are, your practice is down 10-20% for the year. Yet last Wednesday the Dow Jones inched about 7% off of it’s all-time highs in February. How is this possible?
Although one affects the other, "the stock market" (consisting of less than 4,000 companies in the US) is not the economy. So while your practice may be down, consider the top stocks that make up the S&P 500, an index that is weighted by the market capitalization, or size of the companies in it: Microsoft, Apple, Amazon, Facebook, Google, Johnson and Johnson… these companies combine to make up over 20% of the S&P 500. And while they may have had some hiccups during Covid, giants like Amazon and Facebook are thriving. Not in the S&P 500? Small restaurant groups, nail salons, and stadium venues, to name a few.
The economy on the other hand is measured primarily by GDP, or Gross Domestic Product. This is an estimated of all finished goods and services in an economy (like the US). 2015 data suggests that 64% of US GDP is derived from privately held companies (as opposed to publicly traded companies) and employs 60% of the workforce. The S&P 500 by contrast only employees 15-20% of American workers, so how well those companies are performing is not an indicator for the majority of America.
Another item of note: economic growth is based on hard data compiled by the government (thankfully we live in a country where this is considered reliable). The stock market, however, is the price an investor is willing to pay given current prices, earnings and future expectations of growth, and in recent months, some speculate the stock market is a haven for gamblers now that casinos have closed.
Last, the number of government dollars being pumped into the economy is unprecedented. So while there are a lot of people and businesses hurting right now, there’s also a huge tourniquet slowing the bleeding, like the PPP, EIDL and HHS programs that ODs have benefited from. Only time will tell whether it will work, but for now these relief programs seem to have calmed investors' jitters.
Financial advisors preach to stay in the market: this is exactly why. And while linked, there is a disconnect between the stock market and the larger economy, making it extremely difficult to know when to get out entirely and when to buy in. The best thing you can do is make sure your portfolio is positioned for the long run in such a way that you can stomach the good times and bad, and hang onto your lab coat in the meantime!
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