The Economy Is In Trouble. Try Telling The Stock Market
It's counterintuitive.
At a time of roiling civil unrest and an unprecedented economic crisis, stock prices are chugging along quite nicely. In fact, they have rebounded sharply since the dark days of March.
The Dow Jones Industrial Average, which lost 37% of its value between Feb. 12 and March 23, has now regained more than two-thirds of the ground it lost. Same with the broader S&P 500 index.
Or, as President Trump tweeted last week, "Stock Market up BIG. ... The Transition to Greatness has started, ahead of schedule."
It's a staggering turnaround since the early days of the coronavirus lockdowns, when the Dow was routinely falling by 1,000 points or more. On March 16, the most widely quoted stock index had its worst single-day point drop on record, falling 2,997 points, or 13%.
What gives?
Some of the rebound has been driven by a few big tech companies such as Apple and Microsoft, which have returned to their pre-pandemic levels.
"These companies ... have developed just an unbelievable sort of character that just does not exist among the broader stock market," says Jim Paulsen, chief investment strategist at the Leuthold Group.
"They've been able to grow even when the economy doesn't grow. And when the economy does grow, they grow faster. That is an incredible attribute," he says.
A few other companies, such as Netflix and Amazon, have actually benefited from the pandemic. When people are locked inside, they stream a lot of movies and order a lot online.
Because tech giants make up a large part of major stock indexes like the S&P 500, their movements tend to have an outsize effect on the broader market.
But even companies especially hard hit by the pandemic, such as Marriott and Carnival, have risen since March, although they're still down sharply for the year.
What's happened is a clear shift in market sentiment, Paulsen says.
Current economic data may look ominous, with unemployment nearing 15%, consumer spending in a ditch and famous companies like J.C. Penney and Hertz in bankruptcy. But investors are peering into the future and seeing an economy that is beginning to recover.
"Even though it may feel pretty dark now, the stock market tends to price what might happen in the future," says Linda Zhang, founder and CEO of Purview Investments.
"There are a lot of things that have changed to the more favorable side. We're starting to see the reopening of the economy after, across the country, we hit the off switch. We're now putting the switch back on," Paulsen says.
Meanwhile, the Federal Reserve and other central banks have been pouring money into the economy to help small businesses and municipal governments. The Fed is even buying junk bonds.
Even the layoffs taking place right now are a welcome development to some investors. With fewer employees on staff, companies like Boeing and Uber will be more profitable in the long run.
"What is very painful to workers with job losses are often seen as a positive for company earnings and share prices. So this is the big irony," Zhang says.
Not everyone thinks the rebound makes a lot of sense right now.
"For people like me ... what's happening in the market right now is somewhere between puzzling and scary," says Mohamed El-Erian, chief economic adviser at Allianz.
Many companies have stopped giving guidance about future earnings, because the economy remains so uncertain, El-Erian notes.
"So you have this absurd dichotomy between, on the one hand, investors feeling very confident on what's ahead, but what they're betting on — individual companies — are telling you they don't know what's ahead," he says. [Copyright 2020 NPR]
