Why Is the Stock Market Rising While the Economy Isn’t?
Here’s why our stock market is soaring while our economy isn’t.
Why is the stock market doing so well while the economy merely trudges along and remains partially shut down?
There are a few reasons, but there’s also cause for optimism as far as our economy goes. TSA numbers, for example, are increasing because more people are traveling. On a related note, hotel reservations are on the rise, as are steel production and railway traffic. The numbers aren’t spectacular by any means, but it’s growth nonetheless, and it indicates that the economy is returning to normal.
Now, the first reason the stock market continues to thrive is that two asset classes, in particular, are doing tremendously well: healthcare and technology. Advances in healthcare and technology have prevented the shutdown from damaging the economy even further. Many of us have been able to work from home due to virtual platforms like Zoom.
Also, larger companies like Walmart, Costco, and Home Depot were allowed to remain open while their mom-and-pop competitors were forced to close. Some people may not like that (I personally don’t), but these companies were still able to gain market shares and do well.
All told, the market saw an 80% decline in corporate profits in March, but we believe we’ll only see a 25% decline in corporate profits. The market is currently priced at around a 40% decline in corporate profits, so we believe the market is still undervalued.
Lastly, if you’ve been to any of my seminars in the past three years, you’ve heard me talk about M2, or the money we spend and what’s in motion in the economy. Unlike back in 2008 when the Fed would pump assets into the banking system but those assets would never reach the M2 money supply, the stimulus from our current market is making its way into the M2 money supply. That supply is growing at an annualized rate of 70%. That’s a lot of stimulus, and you’re seeing it in the form of PPE, PPP, commercial loans, etc.
As I said, the news isn’t all bad for our economy. We’re seeing small signs of life as states reopen, and in Houston, we’re seeing more establishments opening than in other places.
If you’d like to talk more about our stock market or have questions concerning anything discussed today, don’t hesitate to reach out to me. I’d love to help.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jeffrey Green and not necessarily those of Raymond James. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct.