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Arlington, VA 22207

Is the market on an irrational ride?

September 02, 2020

Back in June as the market was just beginning its rapid recovery from the March Covid dip, I wrote a piece explaining how the market could be going up when the world seemed to be crashing around it.  Fast forward to September and after a record-setting August, more people are asking the same questions with even more concern.  With the pandemic still raging on, lots of businesses closed, unemployment still high, social unrest and other stuff happening, how is it possible that the market seems to hit new highs every day?!?!  There are four core things that everyone needs to keep in mind.

Context matters.  Remember just back in March when the market crashed as Covid really started to hit?  The S&P 500 index was down 34% peak to trough.  When a market drops 34%, it has to go back up 52% just to break even.  Just last week, we got back to the levels we were at before the March Covid dip.  And remember that the top companies represented in the S&P 500 index are all tech companies reflecting the actual facts that working from home demands new and useful technologies.  This thing has accelerated the long-time trends towards distance/remote work and learning.

The “market” is NOT the economy.  Any stock market index is a grouping of a number of companies and does not reflect the overall health of the economy.  The level of the index is a reflection of investors’ expectations for current and future profits of those companies – nothing more.  The market is not a reflection of your anxiety, angst, fear, politics or other emotions so don’t expect it to track your feelings.

The market does not have a conscience.  The market, frankly, doesn’t care about social unrest or how many people have died from Covid.  These are mostly irrelevant to corporate profits and therefore don’t really matter to market levels.  In fact, case counts don’t matter either except if they got to the point that it would force mass economic shutdowns again.  The policies in effect around the country might not reflect the best advice of health professionals but they are working just fine for many businesses.

Individual pain does not create systemic risk.  Yes, there are a lot of people hurt by this pandemic.  Individuals are out of work, businesses are failing or have failed, your favorite restaurant may never re-open.  However, these individual pain points do not mean the entire economic system is failing.  From a social perspective, this thing is exacerbating systemic inequalities.  The people being hurt tend to be lower on the economic ladder and those with resources are comfortably working from home and enjoying a more leisurely life.  That sucks, but it doesn’t mean the world will fall apart (remember the market doesn’t have a conscience!).  Those individual pain points do not constitute a risk to the system.  Regardless of the reason, our capitalist system operates and thrives on “creative destruction”.  New technologies put old companies out of business (e.g., Netflix did quite a number on Blockbuster’s business - seen a video store recently?).  An entrepreneur with capital will take advantage of this and open a new business in the same space where one failed.  We hope our social safety net will provide assistance for the folks displaced, which was the purpose of what Congress did with the CARES Act.  We should help our neighbors through these transitions but not fear the end result.

I hope this gives you a good sense that the market is not on some irrational ride.  I’m not saying whether the market is undervalued or overvalued – I simply wanted to address the questions and concerns that many of my clients have expressed.  The market is not disconnected from reality; it is very rationally and non-emotionally reflecting investors’ collective view of corporate profits, just as it has always done.  #InvestWithAPlan