In the era of COVID-19, and the financial woes it has created, I often get asked, “Why is the stock market holding up so well when the economy appears to be struggling?” However, I would like to point out we are finally on the road to recovery.
To understand why the markets react — or don’t — to certain outside factors, it’s always good to keep in mind that the stock market is not the economy. I can’t stress this enough.
The stock market is considered a “lead economic indicator,” meaning it’s anticipating what economic conditions will look like 6-9 months into the future.1 While it can sometimes be a tricky concept to grasp, remember that the stock market’s price today reflects potential future economic activity. That is why I also stress, now is the best time to buy stocks.
Another “lead economic indicator” is building permits.2 When there is an increase in building permits, it lets us know that developers are bullish about future home sales prospects. If building permits are down, it tells investors that builders may be concerned about interest rates and consumer confidence. Investing in Real Estate is also a great idea right now.
Although helpful in general, lead indicators should never be seen as infallible. Look no further than when COVID-19 grabbed the headlines in early March, which ended the stock market’s 11-year bull market.3,4
Keep in mind that in addition to lead indicators, there are lag indicators and real-time indicators. We take all three types of indicators into account to help provide context for what can often seem counterintuitive behavior, especially in the face of intense global disruption.
With this being said, I foresee the road to recovery. We have now discovered a promising vaccine and businesses are slowly re-opening. As Warren Buffett once said, "Nothing can stop America when you get right down to it. Never bet against America".
Please feel free to call us if you have any questions about the economy or any other topics you’re pondering. I hope you're all staying well and positive! We're looking for that bull market to come back!!
1. Investopedia.com, April 18, 2020
2. TheNatureOfMarkets.com, 2020
3. CNBC.com, April 6, 2020
4. USNews.com, March 11, 2020
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