The question that we are asked the most is how can stocks rise when the economy is so weak and at a time when the number of Covid-19 cases are rising? We wrote about this several months ago and will give an updated answer today. However, before we proceed, we do want to acknowledge that there are still $16 million people unemployed with many large and small businesses that have either filed for bankruptcy, closed, or are in financial trouble. We are sympathetic to all of those who are financially vulnerable and inflicted with pain and suffering as a result of Covid-19.
With that being said, the first reason stocks are rising when the economy is weak is that perhaps the overall economy is just not that weak. In fact, there is significant data to support that the economy is recovering rapidly. The July unemployment report showed a gain of 1.5 million private sector jobs. The ISM survey of manufacturers shows a strong surge in new orders which could lead to an increase of jobs in August. Vehicle sales increased by 50% from their low in April. The weekly unemployment insurance claims, while still too high, have mainly continued to trend in the right direction, downward. While the second quarter GDP report showed considerable contraction in the economy, the good news is that the recession appears to be over, with the economy having bottomed out in late April or early May.
The second reason is that monetary policy from the Federal Reserve is more expansive than at any time in history. This means that the money supply is extremely bloated and is backstopping both the economy and the stock market. Low interest rates from the Federal Reserve have also helped the markets go higher. Bear in mind, we have repeatedly pointed out that Federal Reserve actions and other government fiscal stimulus policies, while important to keep the economy going, will eventually lead to inflationary pressures.
The third reason is that some companies, such as the FANAMA (Facebook, Alphabet (Google), Netflix, Amazon, Microsoft, Apple) and other NASDAQ tech heavy stocks, are really having a tremendous year and are leading the way. Other traditional companies will follow as the economy continues to recover.
The fourth reason is that we are hopefully getting closer to multiple vaccine possibilities and enhanced anti-viral treatments. The markets do respond positively to any good news in this area.
In conclusion, we want to point out that while it may take years for the economy to completely recover from the pandemic and lockdowns, the markets can continue to go up and will experience volatility. It may not be a smooth ride. We will be here along the way to address your concerns and help guide you through uncertainty.
Adam L Schwartz, Partner, CFP®, NSSA®
Barry E Moschel, Partner, RICP®, CLU®, ChFC®, CPA
Tom Manno, CFP®