I can understand why so many people are confused when the stock market seems to be saying one thing, while the economic news and ‘conditions on the ground’ seem to be saying just the opposite.
US equity markets just posted their best two-week performance since the 1930s even as millions filed for unemployment.
Here are four takeaways from Zacks Investment Managent that should answer your question.
- Stocks Don’t Wait for Good News – After the 2008 Great Recession, “green shoots” did not start to appear in the economic data until Fall 2009. But by then, the new bull market was already at least six months old! In March 2009, when the last bull market started, jobless claims were still going up, the unemployment rate was rising, and many news outlets were extremely negative regarding a recovery. But stocks rallied! If an investor thinks this recession could be over by September 2020, there’s a good argument that now is the time to be in stocks—even though we know volatility is likely to persist.
- This is All the More Reason Not to Try and Time the Market – Is the stock market’s big rally off the February lows just a temporary move? Are investors just fearful of “fighting the Fed” and buying the dip so as not to miss out on the next big up-leg? No one has the answers to these questions. If you were to ask me where the stock market will be in September or October of this year (in 5-6 months), I wouldn’t want to make a guess. If you need your invested money in 5-6 months, you should not be in stocks anyway. But if you were to ask me where I thought stocks would be in a year or 18 months, I would feel good about saying we’ll be in a better position than we are today. Being a successful long-term equity investor is all about seeing out years and decades into the future, focusing less on the current moment’s issues and associated volatility.
- Don’t Forget About Technology’s Outsized Influence – The Technology sector has been outperforming the broad market on the way down, arguably as demand within the tech sector has held firm or even gone up (think e-commerce, enterprise software, cloud, etc.). As I write this response to you, if every company in the S&P 500 was weighted equally, it would be down -19% for the year. But since the S&P 500 index is capitalization-weighted, bigger companies like Amazon, Apple, Microsoft, and Google have more influence over the index’s returns. The S&P 500 is down -11% for the year instead of -19% because of Technology’s influence.
- Remember It’s All About Expectations vs. Reality – Finally, in terms of where we go from here, there is little doubt that the news will remain bad for some time and economic data will look bleak for months to come. For stocks to go up, however, often all that is needed is for the actual outcome to not be as bad as the anticipated outcome. The bleaker the news gets, the better chance that companies will do better than expected, which can result in even more stock market rallies.
The bottom line now is not to try and use the news as your indicator for whether or not the market is in the clear. I expect the volatility and uncertainty to persist for months to come, but I also expect the new bull market to begin well before everything feels ‘good’ again.