We have gotten many questions from clients about the disconnect between the tanking economy and the surging stock market.
If you haven’t seen the business news lately, the market had an amazing second quarter while economic trends continue to move downward. The National Bureau of economic research shows that the US has been in a recession since February following a 128 month expansion—the longest in US history. The downturn was led by a decline in employment and production due to the COVID virus. In contrast, by June, the S&P 500 has risen 43% from its lowest trough.
Why the disconnect? And it is a huge disconnect. The main reason is that the economy does not equal the stock market. The economic indicators are snapshots of what the economy looks like right now whereas the market is an indicator of confidence in the future. What this tells us is that investors are highly confident in our future. The Government stimulus response and aggressive response by the Federal Reserve were positive movers in the market. And markets in general are forward thinking.
However, don’t expect this to last. Experts are predicting a second wave of COVID and depending upon the response we could see another drop. All this to say that there is still a lot of uncertainty out there and everyone’s tolerance for risk varies. So let us know if your risk tolerance has changed and as always if you have questions about your situation, don’t hesitate to reach out!