In its purest state, a stock market index is an accurate representation of valuation for the companies listed in it. However, emotions and opinions about how to interpret ever-changing public information regarding these companies affect performance of individual stocks and the stock market as a whole. This creates opportunities for the investor who can manage their emotions well and analyze information correctly.
An idea that I am seeing quite frequently in the media today is that the stock market is out of touch with reality. One reason is that over the last few months, we've seen weekly unemployment applications higher than ever recorded for multiple weeks in a row. On the same days that this information was reported, the stock market went up. How can that be?
Good question. Looking at the trends and considering where this information is headed is important in determining valuation. In short, the market uses the information it has on hand to price out the environment 3-6 months in advance. This is one reason why the stock market is viewed as a leading indicator for an economic downtown- the stock market drops before the economy drops.
These last four months have been a great example of that. If you think back to three months ago, you may remember my blog post discussing what to do in the midst of a large pull back. We were in the depths of a 30%+ year-to-date drop in the stock market. Since then, the government has provided trillions of dollars of stimulus, COVID-19 spread nowhere near the initially feared estimates, and businesses have started to slowly reopen. The market has led the way by increasing before the new data regarding these positive scenarios even became available. Obviously the market does not always get it right, and there are times when the uncertainty of future outcomes is high. This can lead to more volatile markets. Navigating the markets alone or without much advice has led many capable people to make emotional and harmful decisions. At Jones Financial Group, we are here to be relational and help you avoid the pitfalls of investing while you can hopefully enjoy the fruits of your labor.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Please consult your financial advisor before making financial decisions. Indexes discussed are unmanaged and you cannot directly invest into an index. Past performance is not a guarantee of future results. Investing involves risk, including the potential loss of principal. (06/20)