The US stock market just wrapped up its best month in 30 years. The global stock market finished with its second best month. If you blinked, there is a good chance that you missed it. Let’s take a moment to put recent market movements into perspective and briefly discuss why the stock market is likely to rebound before the economy does.
A YEAR (SO FAR) IN REVIEW
April 2020 (orange bar) provided the best market returns for the S&P 500 in 30 years.
These strong returns were hot on the heels of one of the worst months over the same period.
Given that 2020 provided one of the worst monthly returns, followed by the best monthly return, where does the market sit so far in 2020? As of this writing, the US stock market is down 10% for the year, a strong recovery by any measure from mid-March lows.
A 4 month time frame is a grain of sand for an investor, but it is useful to provide perspective on the current market environment. If we step back a little further to the beginning of 2019, almost 18 months ago, the US stock market is up 17%. Perspective can be a very helpful thing.
It is worth noting that our individual investment portfolios are not comprised solely of the S&P 500. Depending on your goals and risk tolerance, there will be a diversified blend of companies, countries, styles, and varying blends of bonds. All will provide their own variation of returns and volatility.
‘THE STOCK MARKET’ AND ‘THE ECONOMY’ ARE NOT THE SAME
If you have been watching the economic developments unfold on the news, you might be wondering ‘how could the stock market have done so well in April when the economy seems to be in so much trouble?’ One reason is that stock markets are forward looking. This important concept means that stock markets did not decline in March because of bad economic numbers, they declined in anticipation of them.
As February and March unfolded, markets had already started to ‘price in’ future unemployment numbers, anticipated declines in corporate earnings, and government action. Many people were surprised when record unemployment numbers were published and markets didn’t seem to move much. Why? Markets had already ‘priced in’ these changes and stock prices moved down weeks prior in anticipation. The reverse is equally true with positive economic numbers. Markets will gradually price in improvements in earnings, the impact of fiscal stimulus, and positive health trends before they actually start to be broadly felt in the economy.
LOOKING FORWARD
It’s counter intuitive, but the stock market and the broader economy operate on different timelines and should not be compared to one another at similar points in time. This concept of ‘forward looking returns’ is the most misunderstood, but most critical, component to investing. Global economic recoveries don’t occur thanks to a single watershed moment that signals ‘time to get back in.’ While these moments make splashy headlines, the real source of recovery will have been a collection of gradually improving data points signaling a more hopeful future. And it’s likely the markets will have figured that out ahead of time.
Thank you for your trust,
Aaron Brickley, CFP, CPWA
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