This year has been a hell of a ride or a blessing in disguise for some, but let’s face it, it has changed our lifestyles that much and we are still adapting. With the sudden pandemic that blown up earlier this year, the ones that are lucky enough to stay away from this virus have been struggling with unemployment, inflation or having to work remotely from home.
For the past few months, I’ve connected with my friends and clients and our conversations have streamlined to a common sentiment… “The economy is not doing well, it’s better not to spend our money unnecessarily…’’ and “I do not think the economy is in a good shape, I don’t think it’s safe to invest”.
“Oh, so this is how 2020’s going to be cancelled”, I thought to myself. During the lockdown, I remember doing more insurance cases over bringing up the topic of investments to my clients. However, I’ve started trading on the stock market with more time on hand. After a month or so, an epiphany struck and I realized what is it that people are so negative on being financially sufficient at a time like this.
There are investors that believe the stock market and the prevailing economic environment moves in parallel. This translate to the believe that the stock market is going to see a huge correction very soon as economic decline has hit the ground hard with unemployment, wage cuts, and the bankruptcy of large retail chains. As a matter of fact, the relationship between the stock market and the economic environment is the complete opposite of what these investors may believe.
The Stock Market
Earlier this year, the U.S. declared that we have entered a recession in February 2020. The recession doubled down with the outburst of the COVID pandemic and the market dived over 30%. However, in less than three months, the S&P 500 recovered its losses in June 2020. The Nasdaq composite crossed 10,000 while the Dow Jones Industrial Average recorded gains. Overall, the market performance has been optimistic for the past 8 months.
“The stock market tends to be what’s referred to as a leading indicator of the economy. It’s not a direct, parallel representation of the economy, but it can give a preview of where things may be heading. “Typically, the market will start declining before a recession is visible and it will start recovering about four months before the end of a recession”.- Jurrien Timmer, director of global macro at Fidelity Investments.¹
So, you may ask why is the stock market rallying during an economic downturn? Does the market ever correlate to the economy? Basically, different areas of the economy respond at its own pace. For example, the stock market plunged in Feb but unemployment peaked later in May. The stock market usually moves ahead of the current economic factors i.e. employment, GDP and inflation. Still, it is not an accurate indication of an economic shift especially in the era of an unprecedented, pandemic-towed recession.
The Economy
“She believes the recent stock market rallies have more to do with the hope by investors that the U.S. will undergo a “V-shaped” recovery where the country’s GDP takes a sharp and rapid downturn followed by a violent upswing. But the upswings are also driven by the liquidity that the Federal Reserve and income replacement programs like boosting unemployment and sending stimulus checks that lawmakers have provided.”- Liz Ann Sonders, Schwab’s chief investment strategist. ¹
When the economy needs a boost, humans come in with economic stimulus. For example, quantitative easing, buying of securities in the market, lowering interest rates or increase government spending, so that we can ride through the tide without drowning.²
Likewise, the Singapore government has pledged close to $100 billion in the past four budgets to help Singaporeans in this pandemic. A Jobs Support Scheme has been created since the start of the pandemic will help companies to cover the salary of workers in the hardest-hit sectors such as aerospace and aviation, arts, entertainment and food services, etc.³
Staying home has drove up tech stocks (Zoom, Apple), home improvement (Home Depot), e-commerce (Amazon), home entertainment (Netflix, Disney+) beyond pre-COVID-19 share prices.
To reborn businesses and recover employment rates, there may be a population of workers eliminated from the workforce silently. When tech-operation takes over traditional businesses that no longer need the same human labor or when its transition fails, it becomes permanent unemployment. The divergence clearly reflects no correlation between the growing stock market and the reality of the global economy.
As of today, there are many things that are yet to unfold. It’s important to stay woke during vulnerable times so that you can see opportunities clearly rather than falling into investment traps as a result of being nonchalant about understanding the fundamentals.
