The economy is going down the stock market is going up! Why and When will they converge?
There are a few future certainties. Here are some of them: Most if not all people will make less money this year from working. Year-end bonuses will be less if not zero. Most businesses will make less than they did last year. People are going to be skittish about spending too much time in indoor community areas, some more so than others. A quick trip to the supermarket is fine, sitting in a cozy restaurant not so much. Going for a bike ride sounds great, a spin class sounds dangerous. A road trip sounds fun, getting into the tube of an airplane like a scene from a horror movie. All around if behavior change is not mandated by law it will be different by choice. This all adds up to a smaller economy, less stuff being made and bought.
Do these future realities jibe with recent market performance? Not if you use earnings valuations as a guide, but that hasn’t really mattered much in recent years. The market seems to be driven by animal spirits and machine algorithms more than by the traditional “buy a business because it is a good investment”. A couple weeks ago Virgin Galactic (a space travel company) reported earnings that were 60% below expectations, not to mention the obvious that they operate at a loss, and the stock price climbed 25% over the next few days.
It’s hard to resist the urge to react to the news or volatile markets in your retirement account. But that reflex should only be the bane of a day trader. Be aware of making or beware of making changes just because you don’t want to miss out. John Bogle and Warren Buffet have said it best, for the long term buy the S&P500 (or something similar) because your investing in the American economy. Right now, the economy is a lot smaller than it was and will take time to get bigger. My point is don’t feel pressure to be all in, or to try and time the volatility. Easing your free cash in overtime into America’s leading companies is good strategy.
The stock market is brittle and any number of varieties of bad news could send it south. The fallout of a closed economy has just begun. Some businesses will flourish, others will struggle to get back to sustainability, and many will close. There will be a butterfly effect across the economy. That extra few empty seats on each flight or in each restaurant. Those few less cars sold by a dealer. Those extra people left without a job for an extended period…. all will add to lower earnings for business’s
During and post World War II government stimulus and resulting deficit reached epic levels. People stopped spending and hunkered down. The world felt unsafe, and things looked grim economically. Then jobs were created, money was spend on infrastructure and people started to spend. 1950, 5 years later, was the start of the Golden Age.
The next few years may be challenging for the economy, your investment account and making ends meet but disasters motivate. They spark innovation, and growth.
So, when will the economy and stock market converge? Maybe never, but the upward trend of both is as inevitable as your next sit down with friends at your favorite restaurant.
As they say in the East The lotus flower grows out of the muck.
P.S. As much as I believe in the Bogle/Buffet approach mentioned above, our lives are complex, and we have plans for our hard-earned money. Being able to structure investments and risk you take around your life goals can make the investment process much more meaningful. Because of that I am planning on partnering with WealthcareGDX, which will enable me to offer investment management with their goals-based technology and investment managers. Additionally, I will be managing the sustainable stock portfolio some have you have used in the past. More soon.
Enjoy your Memorial Day weekend.