In March 2020, COVID-19 began to ravage the United States, putting the nation into lockdown and skyrocketing unemployment.
Entering a bear market for the first time in 11 years, stocks plummeted by 30% on March 23, a substantial drop from its record in February. But while the stock market and the economy were both declining, troubles for the markets were short-lived. The 33-day bear market, spanning from Feb. 19 to March 23, soon rebounded. In fact, the S&P 500 soared 40% in the 50 days following its March 23 low.
Despite the presence of many indicators (e.g., rising unemployment, businesses closing left and right, etc.) that the economy is crumbling, stocks are staying relatively strong. There are a number of reasons this phenomenon can occur. The stock market and the economy have a fascinating relationship; the two are not one and the same.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Current Economic Climate
Unemployment levels shot up to 14.7% in April, the highest recorded since the Great Depression. The rise of unemployment, currently at 13.3% as of May, may be even more telling of the state of the economy: disaster around every corner. Yet, the stock market doesn’t seem to reflect that.
In fact, despite the (hopefully) temporary shocks to our economy, the stock market is going strong.
Why? One reason is that a common assumption about unemployment is it tends to be temporary, lasting no longer than half a year in the most extreme cases. This assumption is so common that it's built into the very fabric of the unemployment system in the United States: The maximum length of unemployment benefits is 26 weeks, or 39 with the passage of the CARES Act of 2020.
That means — according to the assumption — that there's likely little cause for worry, because many of the recently unemployed will soon find re-employment when the government reopens states for business.
Another promising indicator of the current state of affairs is the U.S. gross domestic product (GDP). According to the Bureau of Economic Analysis (BEA), only about 10% of the GDP comprises industries at high risk for COVID-related losses. Therefore, catastrophic economic collapse from financial loss alone is extremely unlikely.
How the Stock Market Works
Amid all of this economic strife, how does the stock market continue to be at worst a minor loss and at best a rising success? Stock market decisions are based on history, research and statistics, so one theory is that people are buying stocks because they're conditioned to follow the trends. With bond yields in the negative, the most common alternative to equity investments is all but lost, leaving investors with nowhere else to go.
"Buy low, sell high," the creed of brokers and investors alike, may be behind the stock's performance. When stock prices crumbled in March, investors leaped at the chance to round up as much stock as they could buy to ride the ramp back up when the economy improved.
This buying strategy could potentially prove massively successful for those individuals who acted quickly. Given the market's forward-looking perspective and upward trajectory, it may appear as though the worst of the COVID-19 economic scare is now behind us, paving the path to future prosperity. However, the future still remains unpredictable, and a second wave isn’t out of the question.
The Future of Our Economy
To grasp the phrase "future prosperity," one needs to understand where our economy is headed. It's helpful to keep an eye on Europe and China. These locations began suffering through COVID well before it hit the U.S. and have since reopened. And the U.S. has followed suit with its own journey into reopening. This ray of sunshine has shown investors the economy may be on the verge of recovery. With investors looking forward, the stock market's high ticker prices represent that ray of sunshine.
Moreover, the Federal Reserve has a history of intervening in the market, particularly during times of economic turmoil.
So, although the stock market plays a role in the economy, it’s important to remember that they are not the same. The bottom line: Regardless of economic indicators, investors should focus on sustaining a portfolio that doesn’t exceed their risk tolerance. Moving forward, there’s still plenty unknown, and we’ll continue to learn about the market’s recovery as businesses continue to open up.
If there’s one takeaway from COVID-19, it’s that now is the time to put a plan in place to ensure security when the markets enter unpredictable times.
-
How Prepaid Verizon Phone Service Works and When It's a Smart ChoiceExplore the differences between Verizon Prepaid and Verizon Postpaid plans—costs, perks, flexibility, and when going prepaid makes sense.
-
Try This One-Minute Test to Uncover Hidden Health RisksFinding out this little-known fact about your body could reveal your risk of heart disease and more. It's a simple, free check for healthy aging.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
-
Supermarkets Have Become a Pickpockets' Paradise: How to Avoid Falling VictimSome stores regularly rearrange inventory with the aim of increasing purchases, and they're creating opportunities for thieves to steal from customers.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.
