For anyone paying attention to the news, it’s been tough to miss the constant negativity surrounding the stock market. From trade wars to interest rate hikes, there seems to be a never-ending list of reasons why so many people are wrong about the stock market right now. However, it’s important to remember that the stock market is a long-term game, and those who are patient and disciplined can still come out ahead in the end.
1. The Stock Market Is NOT Doing Particularly Well
The stock market is a tale of two cities. A few stocks are doing incredibly well this year. The three biggest companies in the US, and the world, are Amazon (+72.2%), Microsoft (+35.9%), and Apple (+30.7%). A quick look under the covers explains why these companies are doing so well during the global pandemic.
But when you look at the rest of the market, you will see a dramatically different story. For example, this year, the S&P 500 Value index is down 16.5%. The Russell 2000, which reflects small-cap names (i.e., those outside the top 1000 stocks), is down 14.7% this year.
The best way to summarize the stock market is: (1) most stocks are down 15%, and (2) a few big tech stocks are up over 30%. Simply looking at the Dow or S&P 500 as a whole muddies the waters and causes confusion.
2. There Has Been A Massive Government Response To Support The Stock Market.
Fiscal policy, via the CARES Act, directly benefited large corporations. This included over $500 billion in loans, guarantees, and a backstop program.
The remainder of the $2 trillion package indirectly helped shore up the economy by putting money in the hands of individuals, small businesses, and others that needed it. A $483 billion Payment Protection Program and Health Care Act further supported.
There has also been a tremendous amount of action with monetary policy helping to support the market. In March, the Fed Funds rate was lowered to effectively zero. Another action was taken to support the flow of credit, including purchasing corporate bonds.
Despite the US dollar’s position as the world’s reserve currency, many are concerned about inflation. Looking at stock prices relative to a hard asset like gold rather than USD is interesting. From this perspective, the stock market appears to be doing even more poorly.
3. This Year Is Unlikely To Impact Large Companies’ Valuations Significantly.
People are correct about Covid headlines. They are indeed bleak. Many businesses will be negatively impacted throughout 2020, 2021, and perhaps some beyond, even with massive government support. We know the big tech and other growth stocks are doing well right now, so let’s consider your average large company.
There are several ways to evaluate stock price. One commonly used metric is the PE ratio, which is simply the ratio of price to earnings. While it can vary significantly over time, the S&P 500 has an average PE ratio of 15.
Some back-of-the-envelope math would say that 1-2 years of busted earnings could negatively impact up to 6-13%. But as we saw earlier, most stocks are down 15%. But we should expect to eventually get past Covid and return to a healthy environment for the duration of most companies’ life cycles.
4. The Reality Is That There Are Record Levels Of Cash To Deploy.
As the Wall Street Journal reported, assets in money-market funds have swollen to about $4.6 trillion, the highest level on record.
At the same time, interest rates have crashed close to zero, with even the 10-year rate at a paltry 0.6%. Rates could even go negative, as has happened in other large economies. So the long-term attractiveness of bonds has all but disappeared.
So, where are investors going to put all this cash?
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FAQ
Why is everything crashing in the market?
The COVID-19 Crash in 2020
The most recent collapse that many investors are still thinking about is the one triggered by the COVID-19 outbreak. As a result of the virus, worldwide governments shut down whole economies to prevent its spread, triggering an economic shock that shook investors.
Why is the stock market tanking?
Stock markets plummeted the day after the Federal Reserve raised interest rates for the first time in over 40 years, ostensibly to combat rising U.S. inflation. The Federal Open Market Committee (FOMC) increased the federal funds rate by 75 basis points (bps) in November 1994.
Why are investments going down?
Many of the causes for the stock market’s decline are well-known: inflation, increasing interest rates, and an energy crisis exacerbated by Russia’s conflict in Ukraine. However, how each of these problems interacts and exacerbates each other is damaging market sentiment.
How much has the stock market dropped in 2023?
The S& P 500 index fell 0.9 percent on Thursday, bringing its 2023 losses to 20.6 percent. The Nasdaq, which sank 1.3 percent, has lost over 30 percent this year, while the Dow Jones industrial average slid 0.8 percent, bringing its year-to-date loss to nearly 15 percent.
Final Thoughts
While it can be easy to get confused by the contrast between negative Covid headlines and positive stock market news since March, people should take a step back and look at what’s happening.
I believe most people are wrong about the stock market, believing it is doing particularly well and that it should perform worse. Most companies have seen dramatic cuts to their stock price since the beginning of the year, despite massive government intervention.
