Friday, August 14, 2020

Are stock market investors completely out to lunch?

I know I have talked about this before, but this week's figures have thrown it into even sharper relief. The S&P 500 stock index has just reached the record levels it last achieved in February of this year. Other stock markets are also looking pretty rosy, even if not quite to the same extent.
So, the stock markets are at record highs even though millions of Americans are out of work, and smaller companies (and even many bigger ones) are struggling to stay afloat. It all seems very wrong. But, as this article notes, "The stock market is not the economy".
Family restaurants, hair salons and pet stores are not listed on the stock market; big tech companies like Apple, Amazon, Alphabet, Microsoft and Facebook are (in fact, those five companies alone make up 22% of the S&P 500's total value). And those big tech companies have done pretty nicely out of the pandemic, thank you very much.
The other thing is that stock markets tend to reflect how the business community thinks the future will go, not necessarily how things are at the moment. So, the S&P's 34% plunge started on February 19th, well before the USA went into lockdown, based on future expectations. By the same token, if investors think that the future will be an improvement over what we have now - and God knows, it couldn't be a lot worse - then prices will tick upwards.
And finally, two other factors are relevant: interest rates remain low, and government stimulus money continues to drive the money supply higher.
So, it doesn't necessarily mean that American and Canadian investors are completely out to lunch. But it does mean that they are way more optimistic about a vaccine, the potential for international travel, and the way the general economy is going to go over the next several months than I am.

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