Below is an excerpt from an article I thoroughly enjoyed reading. It captures the thoughts and emotions of several clients I’ve spoken to recently, and how/why the market can be so high right now amid all the uncertainty.
From its record high on February 19, 2020 the S&P 500 Index1 fell 33.79% in less than 5 weeks as the news headlines grew more and more disturbing. But the recovery was swift as well: from its low on March 23, the S&P 500 Index jumped 17.57% in just 3 trading sessions, one of the fastest snapbacks ever among 18 severe bear markets since 1896. As of August 18, 2020 the S&P 500 Index had recovered all of its losses and notched a new record high…How can stock prices flirt with new highs while the news is so discouraging? One financial columnist recently observed that the stock market “looks increasingly divorced from economic reality.”2
Is it? Let’s dig a little deeper.
The stock market is a mechanism for aggregating opinions from millions of global investors and reflecting them in prices they are willing to accept when buying or selling fractional ownership of a company. Share prices represent a claim on earnings and dividends off into perpetuity—current prices incorporate not only an assessment of recent events but also those in the distant future. In some sense, the stock market has always been “divorced from reality” since its job is not to report today’s temperature but what investors think it will be next year and the year after that and the year after that and so on.
Moreover, the universe of stocks does not march in lockstep. At any point in time, some firms are prospering while others are floundering. This year’s wrenching economic turmoil has inflicted great hardship on some firms while opening up new opportunities for others…it appears the stock market is doing just what we would expect—reflecting new information in stock prices.
Weston Wellington, “Is the Stock Market Divorced From Reality?,” Perspectives, Dimensional Fund Advisors. September 10, 2020
Read the full article here: https://www.dimensional.com/us-en/insights/is-the-stock-market-divorced-from-reality
- 1S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
- 2Matt Phillips, “Repeat After Me: The Markets Are Not the Economy,” New York Times, May 10, 2020.
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