Society has been forced to learn how to communicate in a different way. No longer are we meeting face to face, rather it is over the phone or through video conferencing software. We are no different as we have continued meeting with clients and prospects even without meeting in the office.
With this week’s note, I wanted to respond to a few questions we have heard from clients and prospects during recent conversations.
1. How can the stock market be trading at the current levels considering what is going on in the economy?
a. The stock market is forward-looking: It focuses on what is happening today and what it sees on the path ahead. Much of the recent real-time economic data—such as transportation activity, home sales, and jobless claims—is showing tangible evidence that economic activity—while still depressed—has begun to make a comeback. The path of the economic recovery remains uncertain, but already stocks are pricing in a steady economic recovery beyond 2020 that may be supported if we receive breakthrough treatments to end the COVID-19 pandemic. As of August 5, after being down more than 30% in March, the S&P 500 Index has moved positive for the year, making 2020 one of the largest reversals ever.
Our economy is in a recession. This is not like any recession we’ve ever seen, as it was sparked by a horrible pandemic and happened because people were told to stay inside. The impact it has caused was the worst contraction in gross domestic product (GDP) in the last quarter that anyone who is reading this has ever seen. But what is quite surprising is the fact the Nasdaq has made 30 all-time highs so far in 2020, while the S&P 500 Index has gained four consecutive months, all while the unemployment rate remains above 10%.
Why is this happening? There are two main schools of thought. One is that stocks are forecasting a better economy later this year and into 2021; remember, stocks tend to lead the economy and could be doing so once again. Another school of thought is that the massive fiscal and monetary policies are boosting equity prices, while not helping the overall economy quite as much.
While seeming counterintuitive it isn’t abnormal to see stocks gain during a recession. The chart below shoes that stocks, as measured by the S&P 500 Index, actually gained during 7 of the prior 12 recessions. The S&P 500 gained 1.3% on average when looking at the 12 previous recessions going back to World War II, with a very impressive median advance of 5.7% (the average is skewed lower due to 2008). We would not be surprised if this recession ends soon if it has not already. Remember, the beginning and ends of recessions are not announced until many months later when more economic data has been reported.
2. How will the 2020 election affect the economy and markets?
a. The current election cycle is filled with extreme emotions on both sides of the aisle. What history has shown is the economy and stock market have both found ways to grow no matter which political party controls the White House or Congress. The chart below shows S&P 500 returns during election years.
Even with the unknown of the elections, the S&P 500 has found ways to grow. The current recession has the potential to be a much larger cause for market turmoil than the election. This is not to say the election will not cause some potential volatility in the equity markets. Rather a vaccine or even greater emergence of the virus has the potential to cause even more volatility (positive or negative).
While the above questions are relevant and lead to good conversations, both have something in common. The stock market, the economy, and the election are all things we do not have direct control over. Yes, we can spend money and vote, but ultimately, we can only do so much. One person will not be able to stimulate the entire economy and while votes are important, political candidates may ultimately end up being very different as elected officials.
So, what can we control? We can control our spending, our saving, and our ability to make changes as the rules of the game change. Deciding to start a new business, complete a home addition and even selling a business, these are all events which only you can control. While there are different strategies, including tax, estate, and charitable giving, we have the ability to influence our long-term goals. My father and I continue to look beyond the current election and even the election in 2024.
I know the world is filled with a lot of unknown which can cause much anxiety and worry. If you are worried or just want to talk, do not hesitate to give us a call.
Stay safe and healthy.
Chris Zeches, CFP®