Common Cents # 39 - The Stock Market

 

The Stock Market

 

A lot of people are wondering why the stock market is hitting all-time highs while the overall economy is struggling. The short answer is that the stock market is not an indicator of what the economy is doing, but rather a predictor of what investors think it is going to do. In other words, a strong stock market does not mean the economy is doing well, it means that most investors think it is going to get better.

This is a reasonable position. The world’s economy has been devastated by a worldwide pandemic. As tragic as this has been for thousands of people, by definition, this is a short-term problem. Throughout history there have been pandemics, plagues, hurricanes, floods, earthquakes, and locust infestations. None are indictors of systemic problems and they all had a start and end date. We know that this pandemic will be over sooner or later, and with thousands of people being vaccinated every day, it will hopefully be sooner than later. The best guess is that the pandemic will be over when at least 75% of the population has been vaccinated or has recovered from the virus. This will likely happen sometime this summer. Investors look months ahead so there is plenty of reason for optimism.

Furthermore, investors like stability. With the election behind us and what is hoped will be a stable government ahead, it should be a comfortable time for investors. Buying stock is putting our hard-earned money into somebody else’s business. No one wants any surprises. For that reason, the business community has leaned toward conservative politics. But more than that, they want predictability and fair treatment which comes from professional government and solid decision making regardless of which party is in power.

For individual investors, this would appear to be a good time to invest because bank interest rates are near zero and the long-term expectation of economic growth is very positive.

My wife and I set up a TD Ameritrade account this week and moved a little money from our bank savings account that was not really not making any interest into a mutual fund that we have followed for many years and had good experience with in the past. This was one of the decisions that came from our New Year’s Day Annual Meeting. It was as easy as opening a bank account. The minimum initial amount was $250 so a person doesn’t have to be rich to make good investments.

The new year is always a good time to look at how we spend, save, and invest our resources.  Seeking out good counsel is always a great idea to help achieve a great and exciting financial future. Then, take action to make the hopes and dreams come true.