The Economy Is Not The Stock Market

The Economy Is Not The Stock Market

So here we are….in the middle of a global pandemic.  Unemployment in the US is hovering around 15%.  Businesses are struggling to remain viable.  Hundreds of thousands of families…probably millions …are concerned they won’t be able to make their mortgage payments.

Yet, the stock market is closing in on all time highs set earlier this year.

How is that possible?  What gives?

The party line answers sound something like:

  • “Stocks prices reflect future earnings, not present earnings”
  • “COVID-19 is temporary, and our economy will return as soon as it passes”
  • “The market is just being manipulated by the Fed.  All that cash is pumping up the market”

All these are reasonable responses.  But they circumvent a very important concept that many of us seem to be forgetting recently:

The economy is not the stock market, and the stock market is not the economy.

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Market Update: Q1 2020

Market Update: Q1 2020

Well here we are….one quarter into 2020, and the risk event we’ve all been waiting for has finally arrived.  Volatility as measured by the VIX Index touched all time highs over the first quarter as the Coronavirus spread from China to Italy and the rest of the world.

The stock slide here in the United States was fierce, but a late quarter bounce regained a substantial portion of the lost ground.  More ground, in my opinion, than the numbers really support.

From here, small cap and emerging markets are starting to look like wonderful bargains.  But without knowing the extent of the economic damage & how long the world will be sheltering in place, it’s difficult to make that argument with too much confidence.

Here’s this quarter’s market update.

Market Update: Q1 2020

Market Update: Q1 2020

Market Update: Q1 2020

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Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

Where Do We Go From Here? Market Thoughts & The Risk of Financial De-Leveraging

Well that escalated quickly.  We are now officially in the second fastest bear market on record.  Bear markets become official when stocks fall 20% or more from their peaks.  Ordinarily this takes months to play out.  Bad news comes out, stocks sell off a bit.  Everyone goes home, thinks about it, and comes back the next morning.  More bad news comes out, stocks fall a bit further, and so on.  Here’s some data from Marketwatch on how long it typically takes to enter a bear market:

Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

With the Coronavirus driving the U.S. and much of the world to shelter in place, our economy has come to a screeching halt.  Some forecasters are guessing that we’ll see a 5% drop in GDP this quarter, others are predicting as much as a 30% drop.

Whatever camp you reside in, the picture is not pretty.  Markets did not take long to notice.  Whereas it takes on average 136-137 trading days to enter a bear market based on the data above, it only took us 19 to get there this time – the second fastest on record:

Where Do We Go From Here? Market Thoughts & Financial De-Leveraging

So where do we go from here?  A stimulus package is just about to be passed (finally).  Markets rebounded as much as 12% yesterday and another 4.5% today.  Even though the public health picture still looks bleak, we are starting to wrap our heads around how long the pandemic may continue.

Here are a few things I’m reading and my thoughts on what happens next.

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