Since the pandemic began, there have been unusual activities going on throughout the world economy. At the start of the year 2020, the world’s economy dropped drastically, leaving everyone afraid that the stock market will fall dramatically; however, the market has remained healthy, and even surprisingly, it has got a lot better! Now everyone is wondering how is that possible.
Hello, and welcome to my blog. In this post, I will focus on explaining why the stock market and the economy are not correlating. When you look at the success rate of the stock market, it is shocking to learn it has risen by nearly 40% when the economy is not going great with a fall of 4.8% in the first quarter. This number is not the scary part, but experts predict that there will be an even worse fall of 30% by the end of the year. So the topic for today is 2020’s stock market and economy: why are they so different? First, let us understand what the stock market is about.
About the stock market?
In general knowledge, the stock market is all about how investors see the value of a business. It’s like a market ground where people decide which company is worth what in their eyes. When a company’s potential and progress intrigues and excites several investors, they instantly become high-value businesses.
The stock market and the economy
As I’ve said in my post ‘The confusion of the economic and stock market,’ I explained that the stock market is not a complete determinant of what goes on in the economy; however, it is a strong indication. Here is what I mean; the stock market reflects that the big named companies are producing. Production is a crucial feature in any economy. This is why a country’s economy is measured by the GDP which stands for gross domestic production.
In simple terms, the amount of products and services going on within the country in a year determines the growth of the economy. On the one hand, most big-name companies stopped producing, and many other small businesses stopped providing services, and on the other hand, nobody was spending as much because unemployment rates increased, people were locked down at home, and general physical contacts were cut short because of the virus. In technical terms, the world suffered a black swan event.
This event was enough to crumble an economy, including the stock market, and in the beginning, it did, but somehow, the stock market has stayed healthy. In fact, the S&P 500 has gained 800 points, Dow Jones gained 7,000 points, and the Russel 200 earned 400 points all in under three months. I will be giving you the reason proven and also my opinion on what I think is the reason why the stock market has kept alive. My analysis will be based on the largest economy in the world, the USA. Many other economies have suffered, but the American economy has taken a massive blow which the world now clearly has seen.
Why is the stock market so healthy when the economy is deadly ill?
The question on everybody’s mind is what is going on, and I had that same feeling until I did my research and came up with three simple reasons. I’ll go over them in as much detail as I can.
First, the stock market is dependent upon investors. As I said earlier, the stock market is a market where investors grade the value of companies. Here they predict and judge if a company and its product are going to succeed among consumers. Once investors trust that the economy, which here means the consumers, will love and spend on a product, then they will invest, and when they invest the stocks, and their values rise.
I’ll add this briefly; this also means that if no one is investing and no one thinks the economy will buy or spend, then the stocks will drop. Now, because investors in the USA have been exceedingly bullish, they have kept the stock market above the present fallen economy. Why are they so trustful? Well, it is because many investors believe that we are at the end of the virus. Pharmaceutical companies are in a race to get a vaccine for the virus, and states in the country are quickly opening up to activities.
Some really big players in the stock market are another reason why the stocks are rising, take Elon Musk or the President of USA, they are both very certain that the fall this year will lead to a rise next year. It is even more so that many big companies are itching and encouraging the reopening of the country. Elon Musk, for one, has got his factory up and running, and many other companies are also slowly opening even if it’s at half their usual power. If this happens, then the unemployment rate will certainly drop, and more people will be willing to spend, meaning that the economy can get back on its tracks. Even though no one is sure how quickly the economy will get back on its feet, there is still a great hope that things will get better.
And finally, the federal government is a significant player in what is playing out on the stock market. It is clear that the government is finding ways to keep the market alive. They began by printing money and giving it to banks, then enforcing an exceedingly low-interest rate to encourage businesses, individuals, groups, and more to take out loans which they could use to spend, start businesses, employ people, and generally promote the flow of the economy again. Their efforts have been effective and genuinely helped in keeping the economy out of depression.
On a final note, I would like to add that a major reason why the stock market has stayed afloat, in my opinion, is because after weighing every other option, nothing else beats investing in stocks, let’s take a look at it for a bit, and note that this is my opinion. There is the first option of just keeping your money in the bank, well, that’s a good idea right? But how much have you truly earned in a year from the interest rates the bank gives?
You don’t have to answer that as I know the answer is not much. Then take bonds, bonds are good, of course, and they are a secure option, but that is tying your money down for a long time with a slightly higher interest rate than the banks give, so yeah, maybe that’s okay to get 2 or 3% interest rate while your money gets locked up for years to come. The next option is real estate, yes, real estate is a very great alternative, except with the condition of the economy. Can you honestly say with confidence that the real estate market will not suffer a blow?
I believe that in the months to come, the real estate market will drop drastically, and fewer people will be buying. At the end of the day, you are left with just one option, stocks, it’s easy to liquidate, and it’s not just generally more related to the economy.
Anyway, that is just my opinion, and that of the investors and it really does not have to be your opinion, too. Going back to what we were discussing, you now understand the reason for the weird economic situation. And if you think that investors around the world are wise for making this choice or you feel that the decision is not a very good one, leave a comment for everyone to know your opinion.
Thank you for staying till the end, and It has been a pleasure sharing my knowledge and opinion with you. If you like what I do and would like to be among the first to get my new post, then you need to subscribe. I will also be grateful for a like and even a share to those who need this information. Until my next post, be sure to go through my past posts.
© Lifestyle Tips by Antoaneta
To find out more about the world of investments and finance, please refer to the below: