Amidst more bad news about the spread of COVID-19 infections, and with the economy mired in lockdowns and job losses, the U.S. stock market continues to rise. Why the disconnect?
There are several reasons, and all emphasize the difficulty of making long-term investing decisions through the lens of a short-term outlook.
- Stock indexes such as the S&P 500 are not representative of the U.S. economy as a whole. The indexes are dominated by large, global companies that have more diverse markets and greater access to capital than small businesses.
- Markets are forward looking. Many investors are optimistic that vaccines and therapeutics may bring a sense of normalcy later this year or during the beginning of next year.
- Interest rates are at historic lows, meaning alternatives to stocks are not very rewarding.
- Federal Reserve policies are providing tremendous liquidity and support for the markets, and Congress has authorized trillions in stimulus spending--all providing a boost for stock prices.
- Prominent tech companies have benefited from the shift to work-from-home and the "digitization" of consumer behavior (shopping, communication), driving much of the gain of the stock market.
- Other sectors of the economy that are "beaten-up" (department stores, airlines, travel, etc.) don't weigh that much in stock indexes. So while the struggles of these industries may be prominent in headlines, the weakness of the related stocks has had less of an impact on the markets as a whole.
As we have noted in several of our posts, timing the markets based on current sentiment is harmful to long-term investment returns. Markets tend to be resilient, and show strong growth after sharp downturns.
The most effective response to today's uncertainty-- staying disciplined and sticking to a long-term plan based on a stock / bond / cash mix that meets your objectives. Rebalance when that mix gets out of line due to the market's ups and downs.
Our clients know our investing mantra, "focus on what you can control". In additional to investment discipline, today that means doing all we can to stay safe and healthy during these difficult times.
Interested in learning more about our long-term, disciplined approach? Please connect with us.