The common phrase that “the stock market is not the economy” now seems more relevant than ever. Many are perplexed about the resilience of the stock market, despite ongoing coronavirus and economic concerns, after Q1 2020’s 21% drop and Q2’s big bounce-back of 22% (Russell 3000). The market is up 41% from the March 23 low as of June 30, and +45% as of July 15th, with some indexes up 53%. Say what?!
Stock market rebound?
Why is there such a stock market rebound with so many big questions about the virus, economy, jobs, spending, consumer confidence and more? The answer is the government’s enormous and rapid stimulation efforts, hopes for a quick vaccine, the now elusive flattening of the virus curve, and the fact that some of the biggest companies are significantly benefitting from this economic environment.
What perplexes experts
Despite the Q1 market’s shock-drop, stock valuations at 3/31/20 were near 10-year averages, and the 10-year average return stood at a solid 7%, not far below the 8% 10-year projection of 10 years ago. After Q2, valuations are back materially above historical levels, despite the coronavirus hitting new peaks, even before an expected 2nd wave flu/COVID combo.
There’s no question the market is optimistically looking beyond the near-term, hoping that vaccines and the economy will thread the needle. Current market levels also assume the huge number of lost jobs will not be long-lasting or permanent, and that the Fed will step in again if the economy slips further.
The economy may be resilient, but it is unlikely the roller coaster ride is over. Don’t take your seatbelts off quite yet. And, in the long-run, there may also be an economic price to pay for the big budget deficit.
Despite all of these concerns, we aren’t pessimistic about the long-run for investors who plan wisely. We do, however, discourage over-confidence about the short-run, especially during high unpredictability.
Looking for answers
The greater the unknowns, the more humans crave answers. In response to that, we share some ancient wisdom from the philosopher Laozi:
“Those who have knowledge don’t predict. Those who predict don’t have knowledge.”
We are in the business of improving lives by helping people make effective long-term decisions in the context of uncertainty. Environments such as this make thoughtful strategy and planning more important than ever, for your goals, and for the quality of your sleep.
Stay healthy and sane, and please contact us with any questions or if you want help navigating your finances during this time.
This article is a reproduction of our client quarterly letter which we are sharing publicly during the Coronavirus epidemic to help provide insight and education for more people.