The Stock Market vs. our Economy

Why are stocks trending upwards while small businesses continue to suffer?

The Stock Market is not the Economy.

Those in the finance world hear this all the time, and the COVID -19 pandemic may be one of the best examples of this statement in action.

• The Economy encompasses the overall wealth of a country, specifically in regard to the growth or decline of production. It is measured by Gross Domestic Product (GDP).
• The Stock Market consists of an exchange of stocks. It is the buying and selling of ownership shares in a corporation. It is measured by indices (DJIA, S&P 500, Nasdaq Composite, etc.).

Although stay at home orders and the close of businesses across the globe have been very helpful to combat COVID -19, there is no doubt that it continues to be detrimental for small businesses. As an indicator, 55% of small businesses closed on Yelp have shut down permanently during the coronavirus pandemic. If these businesses haven’t closed for good, they have been required to reduce their hours, their capacity, and/or minimize their offerings and their ability to acquire loans to manage through this difficult time. This is not something that we necessarily see reflected in the stock market. In fact, markets have recently surpassed the highs set before the pandemic hit.

Over the past few months, many of our clients have been puzzled by the rising stock market, considering that amidst the pandemic, GDP dropped 5% in the first quarter and 31% in the second (year over year). Individuals filing for unemployment reached a high of 14.7% at the end of April². That is higher than the peak of 10% in 2009. You have to go all the way back to 1940 to get a number that high. Despite this, stocks have surged and continue to trend upward since initially entering a bear market on March 11^th. Why is this?

The Stock Market Does Not Represent All Americans

Companies represented in the stock market are large businesses, they are not the family-owned restaurants, salons, cafes, gyms, etc. Small businesses have struggled to receive loans after the first wave of emergency lending. Comparatively, large businesses have significant cash reserves and the ability to issue large quantities of debt at very low-interest rates or even issue stock to raise cash to get them through this tough time. Small businesses do not have that luxury. Massive businesses such as Amazon have actually been profiting more due to the pandemic since people have been forced to shop online versus in person. Other large technology companies like Apple, Microsoft, Google, Facebook, and Netflix have also seen minimal disruption in their businesses. These companies make up a significant portion of the stock market to help explain the disparity.

1. The Stock Market Is Forward-Looking
   Stocks are valued by their future earnings. Any short-term hiccup can be quickly muted if the long-term earnings forecasts are still intact. Back in March, the future of the economy was extremely uncertain. The economic recovery timeline was unable to be foreseeable. Uncertainty is not good for the stock market. Once we could start to see a way back to normalcy, even if it would take months, it can be enough for the stock market to see this as mostly temporary.
   
   
2. Investors May Be Driven by Reactions & Emotions
   As a result, their behavior may not be mimicking the economy’s current state nor affairs happening in real-time. Investors often overcorrect and create undue elevated volatility in the short term.

When we think of the country’s financial health, we tend to lump a variety of metrics together – GDP, debt levels, unemployment levels, the stock market performance, savings rates, etc. It is important to recognize, however, that although they have a lot to say about the current state of a country, they don’t tell the same story at the same time.

With the elections around the corner and uncertainty of the pandemic, the market can be extremely unpredictable and volatile. If you would like to receive BakerAvenue’s market updates, watch upcoming webinars, or get insights on our economy, contact us.

Sources:

1. Yelp: Nearly 16,000 Restaurants Have Permanently Closed Due to COVID
2. U.S. Bureau of Labor Statistics and Economic Analysis
3. The most viewed retail stocks on TradingView

Interested in Financial Feminism topics? Visit BakerAvenue’s Financial Feminism MasterClass series to learn more.