The Wiser team tackles the current state of the market and what is responsible for the drastic differences between local economies and the stock market on this week's August Market Commentary episode of the Wiser Roundtable podcast.
On a recent trip to Pennsylvania, Casey found many popular tourist attractions in Gettysburg seemingly empty, while at the same time, stock markets are at an all time high. Why is there such a disconnect? In order to answer this, there are a few factors that must be taken into consideration: vaccine trials, the CARES Act and identifying successful industries.
Understanding what the stock market represents, from a timeframe perspective, is the first step. The stock market does not reflect what is currently happening in the economy. In actuality, the stock market is projecting where it will be in anywhere from 12 to 18 months from now. It is estimated that the stock market recovers 6 months ahead of the actual economy, which explains why it currently appears to be at an all-time high, while local economies and small businesses continue to struggle. There are a few important dates from this year to keep in mind. February 19th, the previous high of the stock market, March 23rd, the stock market low of the year and August 18th, the most recent high of 2020. These three dates indicate a history making rebound, with the shortest bear market and the fastest bull market ever recorded.
Certain industries, and many well-known companies, have positioned themselves to seamlessly transition through the ups and downs of this pandemic. Tech companies such as Apple and Microsoft, along with big retailers such as Target, have seen demands for their products remain high. Their ability to adjust to the current challenges, most importantly the rise in online shopping, has contributed to these larger companies stealing market share from other companies not as well equipped to withstand the shift in consumer behavior. Throughout this year, we have seen large market cap companies, most notably Apple with its recent 2 trillion-dollar estimate, continue to get bigger. However, not all industries have been as lucky during this time. Banks and energy alone are down nearly 30% each and have experienced numerous hurdles to overcome.
From an investment standpoint, this is a market for the indexers meaning those with index funds. Index funds differ from a traditional portfolio made up of stocks and bonds, by avoiding the hassle of picking and choosing individual companies to invest in. Buying stocks requires an investor to predict, with great uncertainty, the success of a company. It is extremely difficult to accurately project how a company will withstand business operations, especially in the midst of a pandemic. Whereas with an index fund, portfolios are comprised of a variety of stocks, used to track a particular index like the DOW Jones or S&P 500. These “basket” stocks are constructed with reputable companies large in size and expected to perform well.
Since the stock market is a reflection of the future, another factor playing into these recent highs is the strong likelihood of a vaccine for COVID-19 being released in the coming months. There are an estimated 170 companies currently working on a vaccine to treat the coronavirus. Of the 170 companies, only 7 are in Phase 3 trials, which is the final step before receiving approval from the Food and Drug Administration. While the FDA awaits a successful Phase 3 completion with positive results, Washington is doing their part to help American families with the CARES Act stimulus.
The CARES Act has been a saving grace for many struggling families as they have seen a hit on their income due to a mix of furloughs and layoffs. The key difference between this year’s stimulus, versus the stimulus provided during the financial crisis of 2008, is where the money went. In 2008, most of the money went straight to the vault of banks and was intended to then use this money to lend out to Americans. Whereas this year, the money went directly into the hands of American workers. In total, there was nearly 270 billion dollars sent out to consumers who qualified this year. Within the CARES Act, there was a Paycheck Protection Program (PPP), which provided upwards of 659 billion dollars in loans to businesses in order to help keep employees on the payroll. Local governments also benefited from this act, with 150 billion given out to help local governments offset costs from public health initiatives. Totaling 2.2 trillion dollars, the CARES Act alone is one of, if not the most, important factor that has kept our economy afloat during these incredibly uncertain times.
Looking to the future, there are talks of a second round of stimulus to further help struggling families and those still unemployed. Although nothing has been approved from the time of the podcast recording, there is a strong chance that there will be another stimulus of some sort later this year. As the presidential election approaches, it is still uncertain how the election results will play a hand in the stock market. As a fiduciary financial advisory firm, Wiser Wealth works in our client’s best interest. Our clients are free to meet with us at any time to discuss any concerns they have surrounding their portfolio and seek advice best suited to their needs.