Why is the Stock Market Doing Great When the Economy is Bad?
Thousands of small businesses out of business – over 3,600 in the first half of 2020…
Dozens of large businesses belly up…
In April, True Religion Apparel.
In May, J. Crew, Gold’s Gym, Pier 1 Imports, Neiman Marcus, J.C. Penney, Hertz, Tuesday Morning and Le Pain Quotidien.
In June, GNC, 24 Hour Fitness and Chuck E. Cheese. And worst of all… Cirque du Soleil.
In July, Brooks Brothers, Sur La Table, New York & Co, Ann Taylor, Lane Bryant and California Pizza Kitchen.
In August, Lord & Taylor, Stein Mart and Men’s Wearhouse.
And we’re not done yet…
Meanwhile, in spite of it all, the stock market performed shockingly well lately. For example, the S&P 500 is up around a ridiculous 50% since bottoming in March 2020!!!
Why is there such a discrepancy?
We found 6 reasons that explain the apparent contradiction.
1. Low interest rates
By creating money out of thin air, the government has flooded the economy with dollars (we lost count… $2 trillion? $3 trillion?). This in turn lowered interest rates. Therefore, bonds, savings accounts and CDs are much less attractive.
In contrast, investors and savers who don’t want to see their money erode because of inflation are more likely to invest in the stock market. More demand for stocks leads to higher prices.
2. Supply and demand
Speaking of demand… Because money is “cheap”, public companies have bought their own stocks (“share buybacks”), sometimes at depressed prices. Again, this lowered the number of shares available.
Meanwhile, investors have also gotten back in the game. You may have heard of brand-new investors “investing” (or gambling) their government allowance on the Robinhood platform.
Again, more demand for stocks leads to higher prices.
3. Good vs. bad sectors
Saying “the stock market” is up or down is misleading to some degree. You need to look at different sectors to really know what’s going on.
Some sectors, predictably, are doing extremely poorly: airline companies, hotels, cruises, restaurants, retail.
Meanwhile, others are doing better than ever: entertainment (Netflix), tech (Apple), communication (Zoom), e-signatures (DocuSign), e-commerce (Amazon), takeout (Domino’s Pizza), telecommuting (Slack), telemedicine (Teladoc).
And then we all know one industry that is booming right now: ours! Many colleagues are reporting record profits. Of course, few vet clinics are traded publicly, but some pet-related companies are (Chewy).
Note: of course, none of the above is a stock recommendation!
4. Forward vs. backward-looking
The stock market has been described as a forward-looking mechanism, not a backward-looking one. What does that mean?
The stock market doesn’t really care what happened 6 months ago.
It does tend to look toward the future: reopening of the economy, the resiliency of the American people, our overall optimistic nature, government intervention, the hope for a vaccine.
When you take these factors into consideration, there are plenty of reasons to explain higher stock prices.
5. Private vs. public companies
While millions have lost their jobs, many are in industries that don’t play a big part of stock indices.
Huh? Let’s discuss a couple of examples in plain English.
Around 4 million jobs have (officially) been lost in the hotel and restaurant industry in the first 6 months of 2020. Many of these jobs have been lost in private mom and pop pizza restaurants rather than publicly-traded pizza chains. Yet restaurants barely make up over 1% of the S&P stock market index.
Similarly, hotels, resorts and cruise lines had to lay off millions of employees. Yet these businesses make up around 0.5% of the S&P.
So all of these job losses are not reflected in the stock market.
Psychology plays a gigantic role in stock prices. When they go up, investors who are sitting on the sidelines tend to have a nagging feeling of FOMO (Fear Of Missing Out). So they are very likely to start dipping their toe in the financial waters.
If their stocks go up, not only are they more likely to invest more, but that encourages others to do the same. This leads to higher and higher stock prices.
So yes, our overall economy is shaky at best. Repeat after us: “The stock market is not the economy.” There are very good reasons to explain why the stock market keeps going up in spite of the madness we’re living.
Enjoy watching your portfolio blossom while it lasts…
Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit
Are you ready to conquer your financial future? Be sure to join us in September for the VFS Virtual Conference. At the conclusion of the event, not only will you have a better understanding of your financial future, you will also have created your financial plan, and become part of a Community of like-minded Veterinarians supporting one another throughout the year.