The Stock Market Is Not The Economy
As the rona has progressed and we have seen a renewed spike in case counts and the ensuing rise in hospitalizations and deaths we have also seen the new round of perma-bears. They all seem to want to see the world burn and the SP500 at like 300. I feel pretty good that as long as we don’t have a nuclear winter we should be safe from that fate, but the idea that “things are bad and consequently the stock market HAS to go lower” is just not true.
Most of the time a recession will lead to the market being down over -30% and it can last months and sometimes years, but sometimes it only lasts a few months and then the market discounts the future-it is a discounting mechanism after all-and it moves higher.
The most recent “end of times” that wasn’t was back in the 1990-91 recession. The SP500 dropped just over -20%, rebounded, and then….never looked back. But this is not to say that the economic outlook was rosy. Actually it was pretty bleak. We had massive amounts of debt, the saving and loan blowups, and were only a few years removed from the 87 crash. And yet the market moved higher.
No less a market wizard than Ray Dalio of Bridgewater even thought we were possibly entering a depression.
Here is the deal though. We did not enter a depression. In fact we went on to have the best 10 years in the history of the stock market.
If you look at the chart below you will see a few things. One is that the “recession” period marked by the big rectangle was not that bad. Being down -20% is not great but when you are at new highs a few months later it is not that devastating. But then look a bit farther along. Dalio’s worry about the economy was in the midst of a bull run in equities that must have seemed ludicrous and yet it didn’t stop.
None of this is to bash Dalio. I am a big fan of his work and read any of it I can. Instead it is to hopefully weaken that little bit of perma-bear in all of us that says “the market has to go lower” when it reality the market doesn’t have to do anything but fluctuate. Sure as hell doesn’t need to do what I say it should it do either, and the same goes for you.
So in the midst of the rona maybe we go lower and enter a depression of sorts and the end of times and wailing and gnashing of teeth and the four horsemen and all of that…but probably not. Right now the market is saying that the end of times notion is incorrect. Maybe it is and maybe it is not but do not make the mistake of thinking that the market HAS TO FOLLOW THE ECONOMY. Because it doesn’t.
Happy Trading and Be Safe,
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