Why is the market going up while the economic outlook is bleak, and the coronavirus numbers are continually climbing? Although predicting the market is close to impossible, there are a few reasons as to why this inverse relationship may be happening.
First, the market is forward looking. Investors focus on what the economy will hopefully do, instead of where the economy has been or is now. Generally speaking, right now investors have a positive outlook on the ability of both the U.S. and the world’s economy to “bounce back” from the impact of the global pandemic. Particularly in the United States, the technology sector plays a major role in the economy and it hasn’t been hit nearly as hard as other sectors. This “tech bump” is helping to buoy the prospects of the American economy and is bolstering investor sentiment. Even though investors have a positive outlook (at the time of this writing), it is difficult to know how the most recent rise in coronavirus cases will impact the economy, and the markets.
A second reason why the market is climbing while we are in an economic recession may be due to the government’s stimulus packages. Both Congress and the Federal Reserve are using many of their tools to prop up the economy. In addition to the $2 trillion stimulus bill (CARES Act) that provided immediate cash payments to families, additional funds for people receiving unemployment insurance and assistance for small businesses, Congress has also passed an almost $500 billion coronavirus-related spending package to provide additional funding to small businesses and for health care costs. On top of that, the Federal Reserve has taken unprecedented steps to try to save the economy from disaster. The Federal Reserve has implemented several lending and credit programs, which could inject more than $6 trillion into the economy. At this point, total government stimulus money is now equal to 25% of the U.S. GDP. Both the stimulus packages and the actions by the Federal Reserve are sustaining not only the economy, but also the stock market.
A third factor is investors who have been waiting for a market drop to invest their money into the market. Prior to the COVID-19 crisis, the U.S. stock market experienced a 10-year bull market. Many investors were aware that the market needed correction and were waiting for a correction to take place prior to investing their money. Once the correction took place in March, primarily due to the COVID-19 pandemic, many investors saw this as an opportunity and invested back into the market. This sudden influx of capital facilitated the rise in prices.
Lastly, a fourth aspect that has contributed to the growth of the market is the basic fundamentals of the market itself. The market is made up of investors who own shares of companies and these companies exist to make a profit. Whether it’s offering new services or selling new products, businesses will do everything they can to adapt in order to make a profit, even during a pandemic like this. The fundamental existence of companies gives hope to investors that they will continue to make a profit in the long run.
The market and the economy are very complex, these are just a few of the factors that help explain why the market is going up, even when we are in a recession. Investors who are trying to maneuver these uncertain times need to rely on “tried-and-true” mechanisms, like diversification and regular rebalancing in order to make it through successfully. Many investors understand that long-term success is not based on market timing, but a long-term investment outlook.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. There are risks involved with investing, including loss of principal. Diversification may not protect against market risk.
Justin Curtiss is a wealth adviser with Sustainable Wealth Management. Justin specializes in asset management, and financial, retirement income and estate planning. Investment advisory services offered through Sustainable Wealth Management, Inc. Investment advisory services and securities offered through KMS Financial Services, Inc. Each entity is separately owned.