Stock prices recover before the economy does. If you are unable to see the message below,
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| | | | | | The Coronavirus Aid, Relief and Economic Security Act focuses on economic recovery for both everyone on a personal basis as well as our nation’s. But remember that there is a huge difference between economic recovery and stock market recovery.
That’s good news, because the stock market acts in advance of the economy. Indeed, investors set the prices of stocks based on their expectation of future (not current) corporate profits, a view typically several months out. So if the stock market feels that corporate profits will be higher in the future, prices will rise now; if the market feels that profits will be lower, prices will fall now.
Consider: In March, most companies were still operating, and earning profits, as usual. But investors began to expect that most companies would suffer a massive drop in business in coming months — so the stock market crashed right away, with the S&P 500 falling 35 percent in a couple of weeks.
Because this is the way the stock market behaves, we can expect stock prices to recover before the economy does. You saw a glimpse of this when the CARES Act passed: the stock market rose sharply — even though none of the law’s $2 trillion had gone out to anyone yet.
This is why it’s so important to avoid guessing when stock prices will recover by timing the market. It’s not a strategy for the long term. We’ve been telling our clients and radio-show audience that they need to focus on three things right now: proper portfolio diversification, rebalancing that portfolio appropriately, and maintaining a long-term outlook.
It’s advice you should strongly consider for your situation as well. If you have questions about putting our advice to work for you, feel free to contact us. My experienced colleagues here at Edelman Financial Engines are all fee-based financial planners, and we’re ready to talk with you – via phone or video conference – if you have any questions about your personal financial situation.
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| | | | | | © 2020 Edelman Financial Engines, LLC. Edelman Financial Engines® is a registered trademark of Edelman Financial Engines, LLC. All advisory services offered through Financial Engines Advisors L.L.C. (FEA), a federally registered investment advisor. Results are not guaranteed. AM1129530
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
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