In the era of COVID-19 and the financial woes it has created, I often get asked “Why is the stock market holding up so well when the economy appears to be struggling?”
To understand why the markets react — or don’t — to certain outside factors, it’s always good to keep in mind that the stock market is not the economy. I can’t stress this enough.
The stock market is considered a “lead economic indicator,” meaning it’s anticipating what economic conditions will look like 6-9 months into the future.1 While it can sometimes be a tricky concept to grasp, remember that the stock market’s price today reflects potential future economic activity.
Another “lead economic indicator” is building permits.2 When there is an increase in building permits, it lets us know that developers are optimistic about future home sales prospects. If building permits are down, it tells investors that builders may be concerned about interest rates and consumer confidence.
Although helpful in general, lead indicators should never be seen as infallible. Abrupt and unexpected changes will prompt lead indicators to rapidly re-calibrate their expectations for the future. Look no further than when COVID-19 grabbed the headlines in early March, which ended the stock market’s 11-year bull market.3,4
Keep in mind that in addition to lead indicators, there are lag indicators and coincident (real-time) indicators. We take all three types of indicators into account to help provide context for what can often seem counter-intuitive behavior, especially in the face of intense global disruption.
There are signs of recovery. The June job report showed that the nation added 4.8 million jobs, a sizeable improvement from the expected 3.5 million. Yet the economy has a long way to go before full recovery. Much deeper than that, America is more divided than it has ever been. From disputes on how to handle the COVID-19 pandemic to the protests and riots over racial inequality, America and her people have much to reconcile as we move forward.
1. Investopedia.com, April 18, 2020 2. TheNatureOfMarkets.com, 2020 3. CNBC.com, April 6, 2020 4. USNews.com, March 11, 2020 5. Businessinsider.com July 2, 2020 |
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. |