The Stock Market Contradiction

If your only window into the economy was the stock market, you might not know that the world was in the middle of a pandemic. The three major U.S. stock indexes – the Dow Jones industrial average, the S&P 500 and the NASDAQ – are all at record levels, continuing the upward trend that started months ago as COVID-19 gripped the world and unemployment levels climbed to unprecedented levels.

The economy today is better off than in the early days of the pandemic, but more than 10 million Americans remain unemployed and large swaths of the economy are struggling. Yet the stock markets keep rising. How can this be? The short answer is that the stock market is not the economy. The long answer is more complex and involves a variety of factors.

To start, it helps to understand what the stock market represents. By purchasing shares of a company on the stock market, investors are placing a bet that the company has the fundamentals to grow and succeed, driving up the price of its stock and, in turn, the value of the investment for the investors. Those investments are being made based on expectations for the future, not on what is happening in the now. Simply put, the rise and fall of the stock market is a sign of optimism among investors, or the lack thereof.

Over the past year, the U.S. stock markets have swung from depths of pessimism and uncertainty to heights of optimism and confidence. When COVID-19 reached the U.S. in March, it triggered an aggressive bear market that knocked out a third of market valuation in a month as investors rushed to protect their positions amid the economic fallout. The markets hit bottom in April before gradually returning to pre-pandemic levels by August and climbing to all-time heights by the end of the year.

This doesn’t mean every stock has grown. In fact, technology stocks have been the primary drivers of the upward trend, with companies such as Amazon, Microsoft and Apple accounting for much of the markets’ success as their technologies have become critical lifelines for business, retail, education and interpersonal relations. On the opposite side, industries most affected by pandemic-related restrictions, including hotels, restaurants and airlines, have seen marked declines in stock price. In that respect, the stock market is reflecting the realities of the pandemic economy.

Importantly, growing investor confidence in the stock market did not occur in a vacuum. It has been bolstered by a mix of federal fiscal and monetary policies that helped support the overall economy, while advancements in public health and medical care provided reassurance that there was light at the end of the COVID-19 pandemic tunnel.

Passed in late March 2020, the CARES Act poured $2.2 trillion into the struggling national economy. With direct payments to households, additional unemployment payments and government-backed loans to businesses large and small, the stimulus provided a fiscal buffer during the pandemic-related downturn. The Federal Reserve also acted, lowering interest rates, implementing broadscale lending programs and enacting other programs to support financial markets that might have pulled back without federal intervention. The combination of these federal stimulus programs provided a safety net for the economy, reducing uncertainty for investors. Record-low interest rates have also played a key role in boosting stock markets, as investors shifted money from the low-yield bonds to stocks in search of higher returns.

The CARES Act and subsequent stimulus packages have helped the national economy recover to a level of stability that might not be optimal but is predictable. At the same time, progress in public health and medical treatment in the fight against COVID-19 have helped the national economy navigate the pandemic to this point. Growing caseloads and hospitalizations remain a concern, especially through the winter months, but the historic development of multiple vaccines in less than a year provides a foundation for hope and optimism in 2021. Vaccines are rolling out across the country and Nevada, with each injection bringing us one step closer to herd immunity and a return to normal. At the same time, a new federal stimulus package was passed last month, and another is likely on the way, providing another round of aid to support the national economy through the end of the pandemic.

As it has for much of the past year, the stock market will likely reflect the national and global optimism that the clock is ticking on the pandemic. I don’t want to minimize that the market may very well be overvalued, and a correction may be inevitable, but the market performance to date is not a reflection of where we are or where we’ve been. It is a reflection of optimism in our economy, in our way of life and in our future.