The Stock Market is not the Economy. My Thoughts on the COVID-19 Stock Market #4

May 12, 2020
By Bob Dreizler

The stock market often makes me crazy. I’ve followed it as a professional since 1978, but it has fascinated me since I was 10. I’ve learned to be patient. I don’t overreact on the up or the down side. I don’t know what will come next. Acting logically can be a foolish strategy, particularly in our current health crisis.

We talk about the stock market like it is a single entity. It isn’t. There are thousands of stocks traded on various exchanges. Sometimes they act herd-like. Normally (if that is still a word?), they move in different directions since each stock represents ownership in a company or conglomerate of companies. Companies are in different locations, in different economic sectors and have different financial situations. When “the market is up” it refers to a stock market index, usually the Standard and Poor’s 500 or the Dow Jones 30 Industrial Index. NOTE: You cannot directly invest in indexes, though alternatives are available.

Let’s refer to the Dow 30 Index as the stock market, though it isn’t. The Dow hit a high of 29,551 on February 12^th, then plummeted to 18,592 by March 23^rd (a 37% decline in six weeks). Then it inexplicitly rose by 31% to 24,381 by May 8^th, regaining about half of the value it lost. Source: CNBC.com.

In November 2018 the Dow was at the same level as now, but you may have noticed that the economy (for which there is no numerical index) seems a bit less perky than 19 months ago. Stores and businesses that were thriving are now closed. Some businesses are declaring bankruptcy and others have gone out of business. Unemployment is almost 15% compared to 3%. Over 20 million Americans have lost their jobs, at least temporarily. Governments at all levels will suffer severe fiscal challenges. America’s Gross Domestic Product had grown annually at a rate from positive 1.5% to positive 3.0% over the last decade. For 2020, a negative 5.6% is forecast by the Peter G Peterson Foundation.

So, why is the stock market at the same level as in the good old days?

My Answer: ??????

Will the stock market take another dramatic plunge like it did earlier this year? My Answer: ??????

How can the richest and most powerful country in the world, with 4% of the earth’s population, have 33% of the reported COVID-19 cases and 28% of its reported deaths? Why does the US have six times the number of reported deaths as the next closest country? SOURCE: theguardian.com

My Answer: ????????

How is it possible that 40% of Americans (a number that never seems to change) think the current incompetent, narcissistic and mean-spirited president is doing a great job? Note: For conciseness and civility, I’ve reduced the number of adjectives in the last sentence from 17 to 3.

My Answer: ?????????????????????????????????????????????????

Every week I listen to podcasts, conference calls and webinars during my shelter-in-place time. I get some insights here and there, but none of the experts knows what will come next.

So, what is an investor to do? Here are some ideas:

Call your investment advisor if you need to talk.
Convert some of your investments to cash if you believe you won’t have enough in savings or your emergency fund for the next two years.
If you are bold, consider converting part of your IRA to a Roth IRA if the stock market takes a significance plunge again. Check with your advisor to discuss this first.
Reduce the volatility of your portfolio if your basic investment comfort level doesn’t match the risk level of your investment portfolio. Do the same if your economic circumstances have permanently changed.
Continuously examine and monitor your personal financial situation without referencing stock market indexes or unemployment statistics.
Finally, hang in there and please stay safe and healthy.

Bob