2020 has been characterized by a worldwide pandemic that has had negative implications on large portions of the economy. Lawmakers had extensive trouble in passing a new $1 trillion-ish stimulus package even though political and business leaders from both sides have agreed that it is pertinent that the government inject this money into the economy. For those that are invested in the stock market, you may be surprised at how well your portfolio has been performing despite the trouble various industries are currently having.
Contrary to popular belief, the stock market is not always representative of the performance of the economy. In fact, the stock market currently seems to be completely disconnected from the economy. CNN Business’ Matt Egan said, “Looking at the stock market’s 2020 performance, you’d never know there was a once-in-a-century pandemic. The S&P 500 is up 13% on the year. The Nasdaq is on fire, up 37%!”
With this being said, it seems as though investors are expecting a total economic recovery long before it is felt on Main Street, looking past the intensifying pandemic and into the future. The highly effective vaccines that have begun being administered are undoubtedly contributing to the growing confidence as we enter 2021. The V-shaped recovery that the stock market experienced was also driven by the actions taken by the Federal Reserve and Congress in the form of multiple stimulus packages and an addition to the unemployment payments people received.
It is also important to remember that the stock market is mainly representative of corporate America, not the general public. It comprises some of the nation’s largest companies who have the financial fortitude to ride out storms such as the COVID-19 pandemic. This means that the stock market can remain in the green while smaller companies like mom-and-pop shops teeter on bankruptcy.
The stock market increasing then acts upon investors FOMO, or fear of missing out. Many investors see the gains companies are making and continue to invest, further driving up stock prices and increasing the performance of indices such as the S&P 500 or the Nasdaq.
Despite the positive market performance, however, it will not be able to withstand a full economic collapse or recession. As the job market recovery seems as though it is slowing down, or has stopped completely, it is possible that investor sentiment towards the direction of the markets will turn around and confidence will decrease. As a new stimulus bill has just been passed and the vaccine is being distributed on a global basis, it will be interesting to see if the stock market continues to outpace the economic recovery.