It’s no secret the stock market had a rapid decline this past March. That’s easy to explain and for everyone to understand. What’s not so easy to explain nor understand is why the stock market has rallied over 20% since hitting “the bottom,” which for reference occurred on March 23, 2020, when the Dow Jones Industrial Average (DJIA) hit 18,591. This is down from a high of 29,551, which occurred on Feb 12, 2020. As I type this, the market’s hovering around 23,500. Everything is still in lockdown, economic activity has generally come to a complete halt, businesses are laying people off. So what’s going on with the stock market? Why is it coming back so strong? There’s certainly not a single right answer to this question, but I’ll try to add some perspective to what’s happening. The quick answer is the stock market is not the economy.
The DJIA is the most commonly referenced market index, and that number on any given day is what is referenced when you hear analysts say the “market” is up or down. The reality is the DJIA consists of only 30 stocks. The value of the DJIA is both price weighted, meaning the largest companies make up the largest share of the index, but it’s also a scaled average. That means the price of the index represents the historic value of each of the underlying stocks, to include for things like stock splits and dividends. When you look at the 30 stocks that make up the index, you see names like Amazon, Johnson & Johnson, Apple, and Wal-Mart. You know what companies haven’t been as severely affected by this economic downturn? Primarily the ones I just referenced. It’s your mom and pop shops, your small businesses around the country that have been disproportionately affected thus far. Johnson & Johnson for example is doing quite well, as everyone stocks up on consumer staples. Same for Wal-Mart. Where are people buying these consumer staples after all? The domino effect that will be occurring in the economy hasn’t quite hit a lot of these companies in the short term. We’ll see if that trend continues.
It’s also fair to note that the market is nothing if not emotional. At the drop of any news, good or bad, you can see wild fluctuations occur. You see, trading is not typically done the way it was in the 80’s, the decade most commonly associated with Wall Street greed. There’s not a huge crowd of people watching TVs, running around with trades on pieces of paper. Virtually all of it is done electronically, with computer algorithms, commonly referred to as algorithmic trading. So financial companies can pre set what their strategies must do based on what’s occurring in the market. That’s why you can see a small dip in the market because of an emotional reaction in the news become large very quickly. All of these algorithms that are programmed to “sell” to avoid large declines, do so at the same time. The same thing happens on the upside as well. In markets like we have today, when there’s so much uncertainty around economic shutdowns and where our society will be over the weeks and months to come, you see these wild fluctuations. So when the federal government passed a $2 trillion stimulus package, the market began to react favorably, and that has compounded on itself. I imagine we could possibly start going the other way just as quickly as we start seeing more economic data come out that is not positive.
The short term fluctuations of the market are not a good barometer of the state of the overall economy. Investing is best played as a long game. The takeaway right now needs to be if you are close to or in retirement, and so much of your mental well being resides on the performance of the stock market, we need to adjust your plan. Your happiness and sense of short term financial security should not be derived by what’s happening on Wall Street. That will allow your focus to be where it needs to be right now, on the health and well being of yourself, your family, and those around you.
Past performance is no guarantee of future returns. Investors
cannot invest directly in an index. Diversification and asset allocation do not
guarantee returns or protect against losses. The information given herein is
taken from sources that IFP Advisors, LLC, dba Independent Financial Partners
(IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and it
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