Do you sometimes wonder, what is the stock market thinking?
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We say it all the time: the stock market is not the economy and the economy is not the stock market. But we’ve had to say it a little more often these past few months. With so much going on in society the market just seems unphased.
Have you ever checked on what Wall Street is doing and thought “does Wall Street like… read the news?” More than 40 million people have filed for unemployment and the COVID-19 pandemic has taken more than 105,000 American lives.
But the stock market didn’t nosedive. It’s been going pretty smoothly.
“Well, first of all, the data we get on the economy is looking through the rearview mirror,” said Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania. A lot of the bad news data is about the past. The stock market reflects what investors think about the future.
“It looks at what is going to happen over the next 10, 20, 30 years,” Siegel said. Also, the market only reflects corporations. “The devastation in the economy has happened in the small shops and stores.”
So, what is the stock market paying attention to exactly? Well a lot of the time, it’s the Federal Reserve.
“Interest rates hovering around zero, the Fed buying bonds and ETFs — even high yield or junk bonds,” said Kristin McKenna, managing director at Darrow Wealth Management in Boston. “It really gives investors confidence.”
Confidence about the future. The stock market reflects the corporate economy of the future, not the real economy of today.
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