Why is the Stock Market Going Up and Will It Drop Again?

We’ve seen strong gains in the last few weeks from the March 23 low. The questions on many investors’ minds are why and will it last.

There is a divergence between the reality of today (e.g., virus spread, lock-downs in many states, record unemployment claims, greatly reduced corporate earnings, rise in bankruptcies, etc.) and what we’ve seen in the stock market over the past couple of weeks. The question is why? Fundamentally, there is a difference between the economy and the stock market — especially over shorter periods of time. The market almost always leads the economy — not in the sense that the stock market dictates or controls the economy — but in the sense that it is a predictor of where the economy is headed. The stock market is like looking through a pair of binoculars. It is looking out and trying to see beyond what is just in front of us. In other words, the stock market is peering past the news of today and into the future. This is always what the market does. This is often why you will see the market decline before a recession and why you will see the market rise before the recession is over.

If you think back to March 9, 2009, our country and the economy were in the throes of a terrible recession and unemployment not seen since the Great Depression. However it was on this day that the market started to turn around and it never looked back. In the valley of the recession, the market looked into the future and saw brighter days – and investors started buying. It can be confusing though when all we see are terrible headlines and the market starts to go up. As an investor, if you wait until all the bad news is gone, you’re likely to miss out on a lot of the gains.

The second question is will the gains last? Will we see another drop in the market? There are very smart people on both sides of this debate. Some suggest we are likely to see a drop back to the lows of March 23 and others say we won’t. There are positive signs that we may be coming out of this – states are talking about re-opening, NY cases are flattening, and the total projections have come down dramatically. The stock market has already priced in very bad economic news including high unemployment, much smaller corporate earnings, and a significant drop in GDP. It has also priced in that we will open the country, a treatment will be created within the next several months, and a vaccine will be available within a year. Although the market is assuming very bad economic and corporate figures, if they come in even worse or if we get discouraging news regarding COVID-19 treatments or if the number of cases ramps back up as soon as we re-open the economy, we could see declines. Rather than try to guess what will happen, we can rely on 100+ years of market research that tells us we will overcome this and the economy and markets will ultimately reach new highs.

There are countless companies and thousands of scientists working day and night to develop a treatment and vaccine. I am confident they will succeed and we will prevail.