In the era of COVID-19, and the financial woes it has created, people often ask, “Why is the stock market holding up so well when the economy appears to be struggling?”
To understand why the markets react — or don’t — to certain outside factors, it’s always good to keep in mind that the stock market is not the economy. This can’t be stressed enough.
The stock market is considered a “lead economic indicator,” meaning it’s anticipating what economic conditions will look like 6-9 months into the future. While it can sometimes be a tricky concept to grasp, remember that the stock market’s price today reflects potential future economic activity. 1
Another “lead economic indicator” is building permits. When there is an increase in building permits, it lets us know that developers are bullish about future home sales prospects. If building permits are down, it tells investors that builders may be concerned about interest rates and consumer confidence.2
Although helpful in general, lead indicators should never be seen as infallible. Abrupt and unexpected changes will prompt lead indicators to rapidly recalibrate their expectations for the future. Look no further than when COVID-19 grabbed the headlines in early March, which ended the stock market’s 11-year bull market.3,4
Keep in mind that in addition to lead indicators, there are lag indicators and coincident (real-time) indicators. We take all three types of indicators into account to help provide context for what can often seem counterintuitive behavior, especially in the face of intense global disruption.
This material was prepared by MarketingPro, Inc. for use by Starlight Portfolios. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Past performance does not guarantee future results.
1 – Investopedia.com, April 18, 2020
2 – TheNatureOfMarkets.com, 2020
3 – CNBC.com, April 6, 2020
4 – USNews.com, March 11, 2020