We hope this finds you well as we enter the Easter holiday weekend! We had a strong rally in stock markets this week. Here is a brief return summary:
Here is this week’s market thought: Markets don’t care about good or bad. They care about better or worse. This means that markets can go up even when times aren’t good. Why does this matter?
During difficult and trying times like this, we come across many questions and concerns from nervous or uncertain investors. In particular, we’ve noticed various forms of the following:
“Shouldn’t I sell now, wait for things to get better, and buy back in then?”
“Let’s wait and see what happens before adding more cash to my account.”
“Once we know more about the economy, then we can get more aggressive.”
Initially, this seems reasonable. The general premise is that the market reflects economic and financial realities. And in the long run, it does. The problem with this strategy is that the market leads the news and the economy. In other words, the markets rebound well in advance of positive economic news, or in this case, positive news on the pandemic.
Here are two charts:
• The S&P 500
• The unemployment rate
Both graphs follow the financial crisis, starting in the summer of 2007 and ending in the summer of 2011. On both charts, the first red oval signifies when the market bottomed. The second signifies when unemployment peaked. This shows that the S&P 500 rallied well in excess of 50% as unemployment kept going up. Had you waited until unemployment started going down, you would have missed a huge part of the stock market rally, and you still wouldn’t have known where peak unemployment was until much later on, when the market was even higher.
On a smaller scale, we’ve seen the market rally significantly over the past few weeks as unemployment claims have skyrocketed and most health experts agree the peak of the COVID-19 health crisis is still ahead of us. Things are still bad, and we don’t know exactly when this will end – but markets can still go up if they are less bad than previously thought. In other words, markets care more about better or worse than they do about good or bad.
This data is not intended to prove the bottom for stocks is in – it might be, but it might not be. However, it does support the idea that waiting until things clear up means paying a lot higher prices for stocks.
Please reach out to us if you would like to discuss this further. Stay well.