Why is the Market Rallying?

Riots, pandemic, destruction. Disastrous levels of unemployment. Awful GDP numbers. And yet the market rallies. This seems discordant, to say the least. It can be hard to reconcile bad news with the surging stock market. Is the stock market wrong? Is it being driven by greedy fools who will soon get their comeuppance? Perhaps. Or does the market have it right? Should we be optimistic about the times ahead?

Much of what is being written and said right now seems accurate to me… as far as it goes. But I think there is a lack of context. I might be completely wrong. My writing here might only provide you with a list of my own biases. But here are some thoughts about what I think is happening:

Different time frames. The markets are forward-looking. The economic numbers reported in the press represent the recent past. Investors are buying stocks because they (we) believe that those stocks will grow in the times ahead. In aggregate, these buys are probably what is driving up the markets. Investors look past the depressing numbers that describe the economy of today to the brighter future they envision.

The collapse narrative is not correct. Frightening times like these can cause us to doubt the very durability of our society. That doubt can go too far. Yes, bad things happen. Sadly for some communities, things can even turn disastrous. But from a broader perspective, the future is likely to be prosperous. I don’t believe our conclusion should be that we are in the midst of collapse. I think we are seeing evidence that our society is actually quite resilient and durable.

The market is dispassionate.

Seeing the destruction and strife occurring domestically and around the globe causes pain to my soul. But the market doesn’t share my pain. The market doesn’t have empathy. It responds to cash flow. It responds to people buying or selling its members (publicly traded companies) and estimations made about whether they are going to grow or fail.  

The stimulus worked.

Government policy is a blunt tool. The massive monetary and fiscal stimulus packages recently enacted in record time and at record magnitude are having the intended impact: stimulus. That this government intervention would be clumsy and flawed was widely predicted; and is beside the point. In late March, there was no real opposition to huge government action. It seems to be working, for now. And going forward we get to live with the benefits. Soon enough we’ll discover the unintended consequences.  

We learn, eventually. Given enough evidence and enough incentive, we learn about our systemic flaws and we make efforts to correct them. Yes, this is arguable because there are still so many flaws. But take a look at the Great Recession.  In the late 1990s the LTCM crisis was like a red flag about the fragility of our markets (a great great great book on this is When Genius Failed, by Roger Lowenstein). We didn’t heed that warning and were therefore underprepared for the Great Recession. However, in response to the Great Recession, we did learn. The responses of Bernanke and others back then laid out the guidelines for Powell today. The banking system is much stronger today as a direct result of actions taken after the last economic crisis. What are we learning now that we will apply to the future?

Wall Street vs. Main Street.

Big companies appear to have better ability to withstand this current crisis than small businesses on main street. Big corporations have greater access to capital, long-range planning capability, and may often use crises as a chance to grow into new areas. This type of durability is reflected in stock market growth.  

My guess? The market has it right. I am betting that better times are ahead of us. Within a year or two, the US economy may well be booming once again. It is likely to look different than before, and not everyone will participate in the boom. But in aggregate, overall, the economy can be changed in ways that can make it better positioned for the future.

As bad as things are right now for small businesses, it is short-sighted to think the story ends there. We are in a moment of substantial transformation and smart entrepreneurs will take advantage of the disruptions they uncover in their communities and industries. I have great faith in the energy and brilliance of small business owners. Old or traditional business models might be doomed, but I’d never count out the ingenuity of the American entrepreneur.  

Many sectors are positioned to thrive in the times ahead, such as technology (internet of things), healthcare (major reorganization), financial services (individualized service backed by technology tools), high-tech manufacturing (re-shoring of some capacity), leisure (domestic travel).  

Future Crises. And yet, there are many areas that should be cause for grave concern.   Our current system has many long-standing inequities and failures. This pandemic and BLM crises are bringing clarity and global attention to many of these problems. I speak here as an investor. If themes such as the ones listed below aren’t addressed and resolved, then the prosperity narrative may eventually disintegrate.

• Legacy of slavery. Many smart historians have made note of this. Until we reckon with this as a society, I doubt whether we’ll be able to maintain long-term economic stability.
• Inefficient healthcare system. To my eyes, the pandemic demonstrated the breadth of dysfunction in our nation’s healthcare system. This sector has to be fundamentally restructured.
• Income disparity. This is related to the legacy of slavery, along with many other factors. If current trends continue, we could face grave social unrest.
• Climate change. And the biggie. Unaddressed, this one could undo us all. But to end on a hopeful note, I think it is quite possible that this current pandemic crisis has the power to teach enough of us that we are in this together and that we ignore the obvious at our own peril. Maybe our combined efforts will actually have the required effect.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.