In the era of COVID-19, and the financial woes it has created, I often get asked, “Why is the stock market holding up so well when the economy appears to be struggling?”
To understand why the markets react — or don’t — to certain outside factors, it’s always good to keep in mind that the stock market is not the economy. I can’t stress this enough. We touched on this week’s volatility in yesterday’s market update.
The stock market is considered a “lead economic indicator,” meaning it’s anticipating what economic conditions will look like 6-9 months into the future. While it can sometimes be a tricky concept to grasp, remember that the stock market’s price today reflects potential future economic activity. 1
Another “lead economic indicator” is building permits. When there is an increase in building permits, it lets us know that developers are bullish about future home sales prospects. If building permits are down, it tells investors that builders may be concerned about interest rates and consumer confidence.2
Although helpful in general, lead indicators should never be seen as infallible. Abrupt and unexpected changes will prompt lead indicators to rapidly recalibrate their expectations for the future. Look no further than when COVID-19 grabbed the headlines in early March, which ended the stock market’s 11-year bull market.3,4
Keep in mind that in addition to lead indicators, there are lag indicators and coincident (real-time) indicators. We take all three types of indicators into account to help provide context for what can often seem counterintuitive behavior, especially in the face of intense global disruption.
For more reading on economic indicators, feel free to check out an earlier blog post on market behavior.
Let me know if you’d like to chat about market behavior, economy or any other topics you’re pondering. A dedicated professional at Epic Capital is here to help.
One of my favorite Wall Street quotes regarding volatility is from Mark Twain, who said: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
To some, the buying and selling of a company’s stock by corporate executive officers and directors can be an indicator of Wall Street sentiment. In July 2020, the ratio of companies with executive buying compared with executive selling touched 0.27 – the lowest level in nearly 20 years.1
Want to give your child or grandchild a great financial start? A Roth IRA might be a choice to consider. There are many reasons why starting a Roth IRA for a teenager may be a sound financial strategy. Read on to learn more about how doing this may benefit both of you.
In March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law. It was designed to help Americans impacted by the COVID-19 pandemic.1 The new law offered investors a financial break. It gave people the option to skip required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs) and 401(k)-style plans in 2020. (Original … Continue reading “The I.R.S. Has Enhanced the 2020 RMD Waivers”
Lately, it can feel like each day brings a new headline about fluctuating market behavior. But amid the ups and downs of 2020, there may be some potential good news on the horizon. On July 16, 2020, the interest rate for 30-year home loans have fallen to 2.98%. In addition, the average interest rate for … Continue reading “30 Year Home Loans Fall to Historic Lows”
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