The Economy is going down and the stock market is going up what’s that all about?
First you have to understand the Economy is not the Stock Market. The economy is loosely defined as the activity related to the production, consumption and trade of all goods in services. So, in simple terms, it is you going to work, making something or providing a service, earning a paycheck and then using that paycheck to purchase goods and services provided by someone else. Multiply that by all the other people, companies, non-profits and government entities out there and you have an economy.
The Stock Market is a market where you can buy or sell stock (or shares) of companies. In the simplest sense their prices are decided by what a willing buyer and seller agree to. People are often setting the price they are willing to pay based on how they think the company will perform in the future, so it may not be as important to them how the company (or economy) is doing right now as long as they are convinced it will do better in the future. They are buying on the belief the company will give a nice return on their investment.
Unfortunately the stock Market is not always rational (particularly in the short term) as there is a lot of emotion and guessing that goes into deciding what will happen in the future and what a good price for a stock today is. One of my favorite quotes comes from the Famous economist John Maynard Keynes. “The market can stay irrational longer than you can stay solvent”.
Anyone that has followed me for any amount of time knows that I am always long term bullish about the stock market and believe it is a great long term investment. One of my favorite sayings is “it is not about timing the market, it is about the amount of time you spend in the market”. I recommend dollar cost averaging as the best method of investment for people starting out and trying to grow their long term savings. That is, putting a regular amount into the stock market each month or each paycheck and leaving it there to grow. That is what people do with their 401ks. There are plenty of studies to show that overtime, investing in that manner almost always beats those that save money in a low interest savings account and then jump into the market when they think it is at its low points. I also recommend you do not put any money into the stock market that you are likely to need in the next 5 to 10 years.
Unfortunately there are a lot of people that do not heed either of those pieces of advice. So the market is irrational. While I usually try not to time the market, when I do, a rule that I stick buy is don’t sell when everyone is panic selling and likewise don’t buy when everyone is panic buying! Markets are always most volatile during economic crisis both going up and down erratically.
For those of you actually thinking of timing the markets I am going to give you my thoughts on what is going on and how I think the market may perform short term and maybe over the next couple of years. I am still bullish on the market long term and think that any money you have that you don’t need for ten years should find its way into the stock market at some point.
My opinions are simply mine and should not be relied on to make your investment decisions. You should do your own research and simply consider this as one perspective.
The market fell really fast as a result of Covid 19, maybe too fast based on the information available at the time. Then a strange thing happened, the Market started to shoot right back up with great speed and consistency for about a month. As of Today the NASDAQ is actually ahead for the year and the other major averages are not that far of their 2020 starting point. Most serious long-term investors I talk to our perplexed and can’t understand why. Ironically the people I hear from that are “gung ho” to jump in the market are mostly new and inexperienced investors who have been sitting on cash just waiting to jump in at the right time. You got it, the market timers. Many were waiting on the sidelines since the last down turn. They were initially afraid to get into the market because they got burned and pulled out when it was low last time. Others are young investors that were scarred by stories they heard about the last big down turn, but now see this one as a chance to make easy money. They sat on the sidelines for so long they feel “safe” now because the market “crashed”. Some of them started buying when the market hit is low in late March. Then as the market starting rising FOMO (fear of missing out) set in and others joined them. They figured the market could only go up (because it just hit bottom in their eyes) and they have bought into the notion of a quick turnaround for the economy, including going back to and exceeding recent highs.
Unfortunately I think we are in a deep recession, and there will not be a quick turnaround. Not everything that shut will reopen, and when many things reopen business they will not get back to normal for quite some time. Over 30 million people have filed for unemployment. Even if 80% of those get back to work in the next couple of months that still leaves 6 million unemployed. It is not just small businesses and restaurants affected like some believe. Several large companies have also started laying off employees and others have enacted across the board pay cuts. Two major retailers have already filed for bankruptcy. None of these steps are taken if companies expect there to be a quick turnaround. All these people that have been laid off or taken pay cuts, won’t be able to spend as much which means the businesses they shop at will do less business and may have to lay off people or reduce pay. The economy spirals down and it spirals up, it does not turn on or off like a light switch.
A recession was inevitable eventually, it is part of the business cycle. This one may have come prematurely but it is here. It spiraled down quickly, but even as we attempt to open up, it is still spiraling down, and it will not be able to go up as quickly as it went down.
So what about the stock market? I think we are in what some in the industry call a “dad cat bounce”. During almost every major market down turn in history the market goes down rather quickly, then comes up pretty quickly to td or near its previous highs just to fall further again, this can go through a couple of zig zag cycles before it hits it’s true bottom.
I see no reason to believe that will not occur this time. In a best case scenario I see it taking several months for the economy to come back. The virus is not going anywhere so even if things open business will be down because many people will still be afraid to go out until there is a cure or a vaccine. Those that aren’t afraid will have less money to spend either because of pay cuts or coming off a layoffs. That is the best case, worse case there are so many things that could spark a panic. The presidents Valet tested positive, what if the president gets the disease? What if there is a resurgence once things open up? What if the disease mutates and becomes worse. At some point I predict the market will head down again. The market timers will either get out to take profits or panic at fear of losing it all causing the market to fall faster. Consumer confidence will erode as will confidence in the market and we will revisit the lows reached in late March.
No one knows how long the present situation will last or can promise you a quick recovery. While I am optimistic we will get through this at some point, anyone that tells you they know how soon the economy and markets will recover is not being honest. There is too much unknown at this point to give any time frames or predictions about the pace of economic recovery. The economy is still falling and the cases of COVID 19 are still rising. Until we see a an actual plateau and then decline in cases, predictions on timing when the economy will rebound are an educated guess at best, and misleading information at worst. Markets don’t like uncertainty or guesses, and they will remain volatile until there is a clearer picture.
If you are fortunate enough to be gainfully employed and want to time the market have add it, but don’t put money in the market that you may need in the short term should you get laid off. You need to have a cash emergency fund of at least six months, preferably more in a recession with so many already unemployed.
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David M. Yesh