How to Read a Discordant Stock Market and Economy

It is commonly assumed that the stock market follows economic performance.  In these abnormal times, such is not the case.  While the month of April showed a global shutdown of businesses, rampant unemployment and low economic growth, the S&P 500 Index ended the month up by 12.9%, representing the highest one-month gain since 1987 and posting the fastest recovery of the fastest bear-market decline in 90 years, according to Investing Daily.

It is true that the stock market and economy influence each other, though one must not forget the irrational emotions that drive stock prices. 

Market volatility is due to both investor optimism that the economy will survive the pandemic, and pessimism that it may take longer that what we all hope for.  This is exacerbated by government action, namely the stimulus package and small business grants, as well as local governments and states closing and reopening their economies.

Stimulus actions provide short-term relief and also presents a long-term drag on the economy. Reduced demand of common products and services may help ward off inflation, but the risk of deflation is just as damaging. Deflation is caused by a sustained period of falling prices, in which lower spending causes businesses to reduce staff and wages.

This brings us back to the stock market, with its eccentric performance that appears driven more by investor superstition, optimism and uncertainty rather than actual fundamentals. Longer term, asset prices will presumably begin to reflect the future fortunes (or losses) of corporations. It’s hard to see a scenario in which a wide swath of companies will thrive in the near term, with certain exceptions (like whichever pharmaceutical companies develop a COVID-19 vaccine).

For now, it’s important to view your portfolio within the scope of your financial goals and timeline for achieving them, as well as your risk tolerance. It’s easy to fall under the spell that a high-performing stock market will continue despite occasional blips, or that we’re in for negative returns for the foreseeable future. Regardless of which side of investor sentiment you fall on, stock market data is the same for everyone. The only differentiation is your own personal view of what will happen next.

Meanwhile, health experts warn of a potential ramp up of contagion in states that reopen too quickly and/or in the fall when flu season commences. Given this possibility, any moves you take right now may be short-term; your view may change again if and when this actually happens. It’s possible we could have a short-term recovery, and long-term investors may want to stay in the market for exposure to that. But no one can accurately predict when the stock market could drop precipitously again, so bear that in mind.

We have strategies that can help mitigate the effects of volatility on your retirement plan. Give us a call, and we’ll help tailor a plan for your personal circumstances.


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