Looking Into The Future

Looking Into The Future

July 17, 2020

With so much negative economic news, and so much current uncertainty — why does the stock market keep going up?

New coronavirus cases regularly top 60,000/day.  Several states are considering locking down again.  Black Lives Matter protests continue in the streets.  Unemployment is at 11%.  And an incumbent pro-business president might not be re-elected.  Why would any of that make the stock market happy?

One thing I always try to remember at times like this is that the stock market tends to focus mostly on the future, not the present.  It’s not dwelling on current unemployment.  It’s busy imagining where we’ll be in a year or two — after there’s a vaccine, once life begins returning to normal.

For example, from the stock market’s point of view, if I need a new car today, but I decide not to go shopping for one because of the pandemic, that merely delays my purchase.  It doesn’t eliminate it.  I’m still going to need a new car after the pandemic subsides.  (Along with all the other people who will only initially realize — 6 months or a year from now — that they too need a new car.)  So will total car sales over the next few years decrease significantly?  Or will car sales merely decline this year, followed by an offsetting surge in sales next year?

Recently we saw a lot of people rushing out to the beach, and to bars, as soon as states re-opened.  While that may have been foolish and/or premature, there’s also no denying the existence of enormous pent-up demand, in many different areas of our lives.

When the economy is humming smoothly along, with no obvious threats on the horizon, the stock market often appears to reflect current positive economic conditions.  But during a downturn, or a crisis, that harmony disappears, replaced by a startling “disconnect” between the stock market and the economy.

But what if that “disconnect” is really only the difference between focusing on the present versus focusing on the future?

During the last economic calamity, 11 years ago, a significant stock market recovery began, on March 9, 2009.  It began while we were still in the throes of the Great Recession.  The economy was in terrible shape.  There was serious talk about the possibility of another Great Depression.  Unemployment was at 9.7%, and continuing to rise, not reaching its peak until November 2009 — 8 long and miserable months later.  Yet during that exact same time, the stock market zoomed upward (inexplicably, according to many observers), with barely any pause along the way.  Unemployment was still mired at 11% in January 2010, before it finally began to ease.  Yet the Dow had gone up like a rocket in 2009, from its lowest point, around 6,500 on March 9th, up to 10,400 by the end of the year. 

Something similar might be unfolding in 2020.  The stock market saw the coronavirus pandemic on our horizon, and plummeted dramatically, beginning on February 19th.  Like a cinder block dropped into a small pond, it fell 30% in less than 5 weeks.  And yet, by March 23rd, when the stock market hit bottom, the economy was only just starting to fray — unemployment was officially still at a very acceptable 4.5%.  The following day, on March 24th, the stock market began its long upward ascent, when the economy was just beginning to tank.  Now it’s July, and the stock market has recovered almost entirely, while 17.8 million workers remain unemployed.

Is that a “disconnect,” or just another instance of focusing on the future rather than the present?

While there’s no definitive answer to that question, there is one very important caveat — that it remains to be seen whether the stock market’s current rosy view of our future turns out to be accurate or not.

 

[All above-cited unemployment numbers are from the U.S. Dept of Labor website.  All stock market numbers are courtesy of the S&P Dow Jones Indices, LLC]