Why Is the Stock Market Going up & Will It Drop Again?

Hi, this is Robert Pagliarini with Pacifica Wealth’s podcast.

Today’s topic is one I don’t often write about or speak about, just because it is so ephemeral, and that of course is the stock market. But, I’m hoping in today’s discussion, there are some longer term lessons that we all can learn and think about as we move forward.

We’ve seen some very strong gains in the stock market over the last few weeks, from the lows of March 23^rd. The questions that I’ve been hearing are twofold: 1) Why? 2) Will they last? Here’s the first lesson:

There is definitely a divergence between the reality of today, that is, the virus spread, the fact that there are lockdowns in many – if not most – states, we have record unemployment claims, corporate earnings have been slashed, there’s a rise in bankruptcies, and the projects for GDP (which is a measure of the strength of our economy) have plummeted. So, we have that reality. We also have seen over the last few weeks the fact that the stock market has increased dramatically. So, the question is why?

Fundamentally, there is a difference between the economy and the stock market – especially, over shorter periods of time. The stock market almost always leads the economy, but 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 recessions is over.

If you think back to March 9^th, 2009, our country and the economy were in the throes of 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 markets start 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, and this is the question that is coming up more often than others, is will these recent stock market gains last, or will we see another drop in the market? There are very smart people on both sides of the debate. Some suggest we are likely to see a drop back to the lows of March 23^rd, and others say we won’t. There are positive signs that we may be coming out of this. States are talking about reopening, New York cases are flattening, and the total projections have come down dramatically. The truth is, the stock market has already priced in very bad economic news, including high unemployment, much smaller corporate earnings, and a significant drop in the 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 reopen the economy, we could see further declines. Rather than try to guess what will happen, we can rely on 100+ years of market research that tells us that we will overcome this and the economy and the markets will ultimately reach new highs. There are countless companies and thousands of scientists working day and night to develop a treatment and a vaccine. I’m confident that they will succeed and that we will prevail.

If you have any questions about your retirement or financial planning, please send me a question by going to www.askdoctorrobert.com. I look forward to speaking to you soon.

Thank you.