Why is the stock market going up?

The stock market is not the economy, but it is a reflection of what people think the economy is or is going to be.
Stock market increasing 2020

One of the questions I get asked the most is, “Why does the stock market go up when it appears the whole world is coming unglued?” That’s a good question and one not easily answered. As I have often said, the stock market is not the economy. But it is a reflection of what people think the economy is, or is going to be in the future. It’s almost like the minute-by- minute, day-by-day collective vote on what people think the future will bring.

But like many things, that doesn’t necessarily mean people are right, at least for the moment. In times of great uncertainty, that is even harder to do than normal. It is often said that when almost everyone agrees on what they think will happen, usually something else happens because the market will have already priced-in the consensus opinion.

The good news for investors is that businesses are reopening while the Fed is providing unprecedented support, and governments are subsidizing the economy to the tune of several trillion dollars.

It seems that none of the currents problems matter as much for stock prices as the good news for investors. The good news for investors is that businesses are reopening while the Fed is providing unprecedented support, and governments are subsidizing the economy to the tune of several trillion dollars. By any measure, that is a serious pile of money. Now, I’m not suggesting by any means that this is all going to end well. It won’t, in my opinion. But that is the current thinking by many.

Does all this matter to the markets? Is there really so much money floating around that the readying of troops for possible deployment in the U.S. capital can safely be ignored? Perhaps investors are getting carried away, focusing on the pile of cash rather than the real question. The fundamental answer is that it’s difficult to make stock trades based on analysis of civil disorder. Riots don’t directly affect markets.

People suffer, some private businesses are destroyed, and a few days of trading are lost. But with few people shopping anyway because of Covid-19, it doesn’t make much financial difference to some of the bigger companies. There are no obvious stocks to buy or sell purely because of the public unrest, which helps explain why the market as a whole tends to ignore it.

The indirect effects of the protests on the markets could be important but are hard to discern, even with the benefit of hindsight. Martin Luther King’s peaceful protests and the racial violence of the 1960s clearly led to the civil rights laws of the era, which outlawed explicit racism in voting and housing. But any link between the unrest and the performance of the economy is questionable. Looting is bad for everyone, but there is no chance it will bring down American democracy.

According to some betting odds makers, the civil unrest and Donald Trump’s response have increased the chance of Joe Biden winning the presidency in November. But it is way too early to be sure whether all this will help or hinder President Trump in the polls. Aside from specific sectors, it’s also hard to know if the market as a whole would do worse from a second term for President Trump, or a potential President Biden with the likely increase in taxes. Higher taxes hurt more, but since they depend on Congress, investors might prefer to bet on gridlock. At this stage, your guess is as good as mine as to which way it will go.

Protests continue in some U.S. cities. My view is that both sides are right to some degree. The civil unrest is less important to the markets than it is to individual Americans, while easy money boosts what might otherwise be a weak market. It is hard to accept that Wall Street can shrug off widely held concerns about serious social issues. But the market isn’t taking a moral position. At the same time, the risks of bad outcomes, political misjudgment, or radical change are clearly higher than they were.

The market is probably ignoring incremental bad news because price momentum has taken control – for now. Many of those who missed the rally are buying-in now and thus pushing up prices. Looking at these stock prices in the cold light of fundamental analysis, this is likely to end badly for many investors. Easy money makes up for a lot of lost earnings. But market momentum always breaks eventually. Thanks for reading.

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About Nick Massey

Nick Massey is President of Massey Financial Services in Edmond, Oklahoma. Nick can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.