Markets Are Up?

Last month, the S&P 500 Index reached another all-time high. However, if you’re like most people, it just doesn’t feel like it. High interest rates, supply chain disruptions, and widespread inflation are all still impacting American consumers. Meanwhile, every day seems to deliver a steady stream of global news headlines ranging from “bad” to “worse.” Also did we mention it’s an election year? 

Over the past 3 years, investors received a collective crash course on a very important investing truth – markets are not the economy. Immediately following the Covid crash in March 2020, the country was reeling from the massive economic shock and everyday life remained entirely upended. However, even with a record number of Americans still unemployed, in just two months the US stock market was up over 40% from its March lows. How is it possible for these two seemingly connected things to be so out of touch? 

The answer is that markets and the economy are not so much “out of touch” as they are “out of step.” Markets are inherently forward-looking, meaning current prices reflect future expectations – specifically, expectations of future cash flows. If the market expects weaker growth in a company’s future cash flows, the price of the stock will likely go down well before we see any real-world impact on the cash flows themselves. In other words, both current and future economic conditions are already “baked in” to the prices in the stock market we see today. 

Consequently, the direction of the stock market does not depend at all on whether the economy is good or bad, (or even if we expect it to be good or bad in the future) – instead, it depends on how the economic outcomes differ from the market’s expectations. For example, if inflation is expected to be 8% but then turns out to be 7.8%, then that bit of “bad” news (inflation is high) will likely have a positive impact on the stock market, because it is not quite as bad as markets expected. 

This often-counterintuitive nature of investing is what can make it so hard to invest successfully over long periods of time. In order to “time the market,” an investor wouldn’t just have to predict the future, they would have to predict the future’s future. This is why we build our client portfolios with a level of diversification that has all those possible futures in mind. So, whether markets or the economy are weak, strong, or anywhere in between, you won’t have to worry about predicting all those future futures – your plan has you in a position to succeed.

Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten