2020 was a financially difficult year for many.
Industries tanked. Major companies filed for bankruptcy. Thousands of people lost their jobs, and many more had their hours cut. Even a year later, countless businesses and households are still reeling from the pandemic.
But if you take a look at the S&P 500 index, it tells a very different story. It hit a record high on Feb. 19, 2020, and then dropped more than 30% by March 23. From there, it climbed back up, recovering fully by Aug. 18, 2020. As of the writing of this article, the S&P 500 has just notched its best day since June.
Why the discrepancy? How can the markets thrive while people are still grappling with financial losses from the pandemic?
The Stock Market and the Economy: Parallel Universes
Here’s the thing: the stock market and the economy aren’t describing the same thing. They might both be indicators for the financial health of our nation, but neither gives the full picture.
Here is what each looks at specifically:
The stock market pools the opinions of investors and reflects the prices those investors are willing to pay per share. Prices can be affected by recent or upcoming events. It measures investor confidence and optimism.
The economy measures the resources and wealth available to a country and its citizens. It reflects the reality of our country’s financial situation.
So both of these things show just one piece of the whole. In many cases, they do seem to align with each other. If the stock market is struggling, the economy is likely to struggle, and vice versa. A strong economy buoys investor confidence, so they put more money into the stock market.
But 2020 was an excellent example of how divorced from each other the stock market and economy can be.
The 2020 Effect on the Stock Market and Economy
When you dig a little deeper into what went on below the surface of the stock market and economy in 2020, their divergence actually makes sense.
Let’s start with the stock market. The S&P 500’s impressive comeback last year was not a rising tide. Everyone didn’t do well. Some industries struggled – and continue to struggle – massively. But others – think Amazon, Zoom and Netflix – benefited immensely from the lockdowns. People didn’t stop spending money; they just changed the way they spent. That same behavior was reflected in where people chose to invest their money.
You can also look at the recent spike in investors from Reddit and Robinhood to see how quickly prices and demand can be manipulated.
The economy showed the struggle of people abruptly changing their everyday habits. The travel, restaurant, personal care and event industries came to a grinding halt. But those weren’t the only affected industries; the U.S. hit Great Depression-era levels of unemployment.
Those struggles were echoed in New Hampshire, where nearly half of all households faced income loss between March and July 2020.
Looked at separately, the stock market and the economy look like they were reporting on different countries. But together, they show the extreme disparities that can happen when the nation is in crisis.
What does this mean for investors?
As the stock market and the economy are telling different stories, you should also be careful to keep the two separate. Try not to let current events dictate your investment decisions, and do your best to think long-term when it comes to building your portfolio.
Here are some additional posts to help improve your portfolio:
Approaching Retirement: Prepare Your Portfolio
Accumulation Phase: Plan Your Retirement Allocations
Risk Tolerance: What it is, and Why You Should Know Yours
Do you need help getting your finances organized? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.