How out of touch with reality are today's stock market numbers?
Is the stock market oblivious to the nearly 40 million Americans out of work??
Is the market really that out of touch with reality?
No, it isn’t, but to understand why you need to adjust how you view the market.
For starters, the S&P 500 is NOT the market.
It is made up of 505 of America’s largest companies, and I’d argue it is one of the worst representations of what you and I experience on a daily basis.
According to the Small Business Administration, 99.7% of the US is employed by small businesses, defined as a company employing less than 500 employees.
Out of the 505 companies in the S&P 500, guess how many fit that criteria?
Ten. And nine of them are real estate companies.
Welltower (about 450)
Realty Income Corp (194)
Alexandria Real Estate Equities (439)
Market Axess (454)
Ventas Inc (about 500)
Healthpeak Properties (204)
Duke Realty Corp (400)
Host Hotels and Resorts (175)
Regency Centers (450)
Federal Realty Investment Trust (313)
Yet we compare everything we experience on a daily basis to those massive companies, claiming the market is irrational and out of touch with reality.
Giant, deep-pocketed companies benefit when the smaller, more shallow-pocketed companies go out of business.
These behemoths don’t accurately reflect 99.7% of America's reality. So then why do we say, “How can the ‘market’ (but we mean S&P 500) be going up when all I see are businesses struggling?”
Here's what I mean... When the mom and pop burrito place down the street has to close because of the pandemic, where will I turn?
If I’m nervous to head to my local grocery store to buy food, what’s a good alternative?
What do we do if our family can't keep our tradition of going to the movies on Sunday afternoons?
Giant companies benefit from capturing market share when their smaller competitors go out of business, but...
Just because the S&P 500 has rebounded doesn’t mean the entire market has.
Here are the best and worst performing sectors so far this year. Tell me how “out of touch with reality” these numbers seem (thanks to Fidelity's site for these numbers)…
Information Technology +11.58% - Anyone been on Facebook or a Zoom call this pandemic? Worked from home? Need I say more?
Consumer Discretionary +8.02% - How is that possible? Doesn’t discretionary spending include things like cars, hotels, travel, and luxury goods? Forty million people are out of work and nobody is allowed out of the house. That doesn’t makes sense…
Until you check out how the sector breaks down:
Internet and direct marketing retail is up 34% on the year while nearly the rest of the industries in the sector are down double digits. Have you made any Amazon purchases this year? Etsy? Shopify? Ebay? Not too out of touch after all.
Financials -15.34% - The financial sector contains companies typically involved in some type of lending - mortgage, personal, business, etc. What happens to loans when 40 million people are out of work? It’s not a shocker that the sector has struggled.
Energy -25.85% The energy sector is made up of companies whose businesses are involved, in some capacity, with the production of oil, gas, coal, and other fuels. When an oil war in the middle east between Russia and Saudi Arabia is combined with a global pandemic that halts all planes, trains, and automobiles, you get sector numbers like this.
What about individual stock performance?
First the good….
Remark Holdings +324% - An artificial intelligence company used for facial recognition, security, and temperature detection.
Tesla +135% - Yes they make cars, but how do they sell them? Mostly online, not in stores.
Sea Limited +150% - An online gaming platform and e-commerce platform - sounds perfect for forced excess time in the home
Now the bad…
Ingersoll Rand -75% - They make industrial equipment that services the manufacturing, energy, mining, travel, and construction industries. Those industries have been hit hard by the pandemic.
Noble Corporation -65% - They provide drilling services for the oil and gas industry (see above sector info).
Denbury Resources -63% - Provider of oil and natural gas, again not a shock here.
When you dig deeper, the market doesn't seem so irrational after all.
Stock prices reflect what we know today, but price MOVEMENTS are windows into a business’s future.
Bright future, prices tend to go up over time. Dismal future, prices tend to go down over time.
Think of it this way: the market was in a free fall when the coronavirus made headlines. NOBODY knew what the future of the virus looked like, but fear mongering in the media made us believe the worst.
The market moved down significantly.
Today we have a better handle on how the virus affects us, and the market reflects what we collectively feel about the future of our economy, the good and the bad (more below).
Will there be more drops? Definitely.
Have we already seen the bottom? Who knows. Your guess is as good as mine.
But what I do know is that any decline we experience is because investors, at that point in time, don't feel good about the future.
When thinking about the market, pay attention to movements of companies, sectors, industries, etc...that's a more telling indicator of their future than the current price of the S&P 500.
Despite the water cooler talk, media headlines, or golf course banter, the stock market is incredibly in tune with both today and the future of our businesses. And the sooner you understand how the market works, the sooner you’ll learn to work with it, and ultimately, make money in it.
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