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Why the Stock Market and Economy Are on Different Paths

If you are confused, you are not alone. How to cut through the mess of messages.

Look at the cnbc.com red banner headline from last Tuesday, April 14. Then look at the bottom right corner of this picture. Maybe I should just leave it at that for today. But I won’t.

Here is a summary of the current Wall Street media buzz:

  • We all know the economy is terrible, and it’s going to be terrible, thanks to the Coronavirus shutting down so much global economic activity
  • That’s a 2020 story, but if you look toward 2021, the economy will have a huge bounce-back year. So let’s base our assumptions and outlook on that.
  • The stock market is looking ahead to that rosy outcome, and that’s why it’s doing an “oops, I didn’t mean to overreact that much” thing right now. Heck, as of Friday morning, the Nasdaq 100 was slightly up for this year. Granted, it was up over 10% before peaking with the rest of the global stock market in February.
  • The economy will be “re-starting” soon and all will be back to something like normal. Let’s raise our expectations for everything. Can I get an “Amen?!”

Bottom-line: the economy is all-time bad right now, and will be for a while. However, the stock market has not seemed to care. The S&P 500 has gained over 25% in just over 3 weeks.

Here is my take on these developments:

It is Wall Street’s job to keep everyone enthusiastic

Nothing is more natural to big investment firms than “talking their book.” Higher trading volumes, more interest in the markets, greed over fear, etc. Can’t blame them for it. Compensation drives behavior. It’s part of capitalism, and it has been there as long as the organized financial markets have been around.

No one knows what the market will do the rest of the year and into next year

However, we can and should be constantly evaluating what is possible, likely, or a “black SWAN.” Only then can you be prepared for events like the first quarter of 2020.

Bear markets rarely end with everyone trying to pick the bottom

FOMO (fear of missing out) is back because it never left. The most likely case is that the bear market ultimately ends the way they always do – with investors despondent, and swearing off stocks forever…only to hop back on 200% higher, years later. It’s buy high, sell low, isn’t it? Nope, it’s the opposite.

This is neither a time for optimism nor pessimism, bullishness nor bearishness. It’s a time to be realistic.

And, for investors who are within 10 years of retirement or already retired, that means allowing for a very wide range of outcomes, and….this is the key….having a specific action-plan for each one of those scenarios. That includes assessing in advance what will happen if your strategic approach turns out to be completely wrong. THAT is investment advice. Everything else is just sales.

What’s the prescription? More cowbell?

The Fed has been the proverbial cowbell, essentially agreeing to be the safety net on everything from loans to junk bonds. Central banks have made a (bad) habit out of taking the risk out of taking a risk. There is no telling when that will end, and when the markets will care about the current risk.

Ironically, this is a lot like how we got here in the first place. Years of “easy money” policies encourage speculation; investors are propped up, placed on third base but think they hit a triple. But it is critical to understand this: no matter what anyone says to explain away stock prices going up, down or sideways, the reason for those moves ultimately comes down to the same thing: buying pressure and selling pressure. And, the only way to truly evaluate that is through monitoring and analyzing price movements, and then linking them to real-world reward and risk potential. You strike a constant balance, and allocate according to your specific objectives.

Danger and opportunity: lots of both

That may sound vague, but all I am saying is to develop a process that is less about what your TV tells you, and more about data, history, identifying patterns, trends and investment value. As I have said here recently, evaluating the latter has been particularly difficult the past few months. It will get more “normal” again, but only when the market is good and ready for that.

In the meantime, we are living through a time of great danger to those who have built wealth. BUT, at the same time, the opportunity to exploit these strange times is perhaps greater than I have seen in 34 years of being a practitioner and student of the markets. I will have more specifics on all of the above as this week rolls on.

Related: How to Pivot Now That 60/40 Investing Just Got Even Tougher