Mind on Money: A welcome return to a long-term focus
I am answering the same question a couple times every day now, “Marc, with the economy shut down and everyone locked down at home, how can the stock market be going up?”
It is a great question, and I wish I had the entire answer. To be candid, I am a bit surprised at the scope and length of the current rally, which started around the fourth week of March. I’ve got some theories as to why the rally has been so robust and persistent, but underlying these theories remains a healthy dose of skepticism.
When investors talk about the ”market being up,” they are typically referring to a high-profile index like the Dow Jones Industrial Average (the Dow), or the S&P 500. Of course, it’s not possible to invest in them directly, but these baskets of stocks are considered by most to be “the market.”
These indexes, however, are compilations of actual stocks of individual companies, and so underlying any index is a formula of which companies it comprises. According to recent analysis produced by Goldman Sachs, just five companies now account for 20% of the market value of the S&P 500.
So, who are these companies? Apple, Amazon, Microsoft, Facebook and Alphabet (Google). While I’m not going to get into a deep dive on these five corporations, a case could be made that the business model of each of these companies isn’t hurt by the pandemic and shelter-at-home orders, and to go a little further, it’s not hard to imagine how each of these companies may actually thrive under our current state of affairs.
The Dow is even more concentrated, with Apple and Microsoft alone accounting for about 14% of that index. So, when we are following and evaluating the “market” in a very real way we are largely following a few companies who appear fairly well situated to endure the pandemic response.
Going beyond the composition of the “market” in general, it's difficult to overstate the level of financial support being provided to the financial markets by the Federal Reserve during the COVID-19 crisis. Not only did the Federal Reserve declare the possibility of an unlimited expansion of the money supply during the crisis, it also announced it was expanding its market-related activities into commercial mortgages and even corporate bonds. While I don’t know if the Fed has actually affected any purchases (support) of these types of securities, just the mere possibility that it could is likely sufficient to provide impetus for securities of all types to move higher, which they have.
And finally, in its base form, stocks in general are a discounting mechanism, which means investors are primarily looking forward in an attempt to discern not just what is happening, but rather what will happen over the next quarter, year, five years, etc.
As I wrote last week, due to the speed and unprecedented nature of the pandemic and pandemic response, the what “is” happening part of the discernment process is too messy to be useful, and so investors have had to look forward, beyond the crisis to develop assumptions and make decisions.
In this regard, I believe markets are putting fear and anxiety in the rear view mirror and attempting to price in the prospects and speed of hope returning to the nation. As COVID-19 treatment protocols evolve and improve, spring arrives across much of the infection zone, and lock down orders relax and head toward repeal, I for one am feeling much more hopeful that the other side of this crisis is near.
As an investor, I am taking this hope and using it to get more comfortable with the positions I currently own and look for entry points to prudently add exposure here and there. While I have no problem harvesting gains made during the crisis rally, I too am getting back to focusing on the longer term, and I must admit, this feels pretty good.
Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at email@example.com. Securities offered through LPL Financial, member FINRA/SIPC.