5 Reasons Why the Stock Market Is So High Right Now

5 Reasons Why the Stock Market Is So High Right Now

I know a lot of people are curious about the market’s recent performance, and that makes sense. Now it’s true that stocks fell dramatically in March, the Dow Jones Industrial Average for example fell from $29,348.03 at closing on February 19th to $18,591.93 at closing on March 23rd. That’s a drop of around 37 percent, which is an incredible change in such a short period of time, and March 12th was the largest single-day drop since 1987 until that record was broken four days later on March 16th.

So it’s not like stocks haven’t reacted to the pandemic. But what might be surprising is how quickly they’ve recovered compared to the economy as a whole. This could change in the future, but as of closing on August 24th the Dow Jones was at $28,308.46, which means it had already recovered to a level over 95% of what it was in February.  And the S&P 500 is right now higher than it’s ever been, that’s right, despite the horror show going on in the financial lives of many Americans, the S&P 500 is at record levels.

Meanwhile new unemployment claims are slowing down relative to the beginning of the outbreak, but the overall unemployment rate is still over 10 percent compared to just 3.5 percent in February. To put this into perspective, that means that there are almost three times as many unemployed people as there were in February when the stock market began to fall, but the market itself has almost fully recovered during that time and by some standards completely recovered and then some during that time.

So that leads to the obvious question, why is the market coming back up if people aren’t going to work, if people are struggling, if a second stimulus continues to be stalled? And my goal in this article is to explain how the stock market works, how it’s related to the workers, and why it can do so well even when so many people are struggling.

1. Stock prices don’t always depend on workers.

The first thing I want to mention with respect to the stock market is that it doesn’t have any direct relationship to the workers.

Of course, that doesn’t mean that the working class can’t affect the stock market. For example if workers go on strike, a company might not be able to meet its normal production quotas, and that could hurt its stock since investors would worry about profitability. But if they can replace those workers or make the remaining workers work even harder, that could be enough to bring its value back up even if it hurts the majority of people who work for the company.

So even though workers are sometimes necessary to produce the profits that shareholders are expecting, there’s nothing that ties the unemployment rate, the minimum wage, or anything like that directly to the value of stocks. The welfare of the workers isn’t something investors necessarily need to spend much time worrying about if they just want to make as much money as possible.

Now some investors do take these social issues into account, but in general social considerations aren’t part of the value of a stock unless they impact something that’s more directly related to the company’s success—maybe they’re hit with a big lawsuit or some new regulation affects production.

Now you might be wondering if stocks don’t depend on how the workers are doing, what do they really depend on? And that question is more complicated than it seems. You can predict stock performance in certain ways, for example here’s how Zoom stock has grown since the beginning of 2020:

Obviously a lot more people started using Zoom once the pandemic hit, which meant that investors had more confidence in their ability to turn a profit and grow in the future. And if you were up on the news in January or February, if you knew what was coming, maybe you could have invested beforehand, the value has quadrupled since the beginning of the year so there was the opportunity to earn a lot of money. But of course GoToMeeting, TeamViewer, or any other application could have taken over the new market share in the same way, and it’s hard to know something like that in advance.

The weird thing about stocks is that you’re selling a share of the company itself, so ultimately the price of a particular stock is determined by how much people are willing to pay for ownership in that company. It doesn’t have to reflect current profitability, current revenue, current market share, anything like that—it’s just a function of how people expect that share to hold value. So Uber for example has operated at a loss for years, but investors still believe in its future and they want to hold their shares and see what happens. Now they won’t stay patient forever, and Uber will need to prove that it can outperform Lyft and any other competitors, and recent regulation like AB-5 in states like California could threaten its long-term prospects, but its share prices will only fall when something makes investors lose confidence in the future of the project.

So just to recap it’s certainly possible for worker-related issues to have an impact on stock performance, but that doesn’t necessarily have to be the case in every situation. If investors think coronavirus is just a passing problem, that we’ll have a vaccine soon and get everything back to normal, they might not be worried about selling their shares.

On the other hand if it drags on, if we’re forced to stay in quarantine or we see a second wave, those future returns could start to look a little more bleak. Especially as more businesses start closing it will get harder to stay confident in the market. But right now at least most investors aren’t treating this as a long-term threat, they have faith in companies to get back to work and start turning a profit in the near future.

2. Large corporations can weather the storm

Another issue that affects the stock market is the fact that most market indexes don’t look at small businesses. If you buy the S&P 500 you’re exclusively investing in large businesses that tend to have excellent cash flow and substantial reserves. These companies are in a better position to stay afloat during the pandemic, and many of them are tech brands like Netflix, Amazon, Facebook, and Alphabet, which owns Google.

So even though research indicates that more than 100,000 small businesses could close permanently due to COVID-19, that might not have much of an effect on the stock market on its own. It could become a problem if those people stop consuming, maybe unemployment keeps rising and Americans don’t have as much to spend which would affect corporate profits. But again for now it seems like the stimulus measures have helped prevent that issue from negatively impacting the market, and we’ll see if that changes now that second stimulus negotiations have stalled.

3. Federal aid is mitigating the damage.

Now it’s true that larger businesses are generally better equipped for a disruption like this, but coronavirus did catch most of us off guard. As you’re well aware if you follow my channel, negotiations on a second stimulus bill have fallen flat recently, but the CARES Act, which was signed into law on March 27th, included some really robust measures to minimize the economic damage of COVID-19.

This bill included the $1200 stimulus check which millions of Americans received earlier in the year, and it also provided other forms of aid including a $600 supplement to weekly unemployment checks, the extension of unemployment benefits to self-employed workers, small business loans through the Paycheck Protection Program, and relief for businesses in industries that were hit particularly hard by the virus. So for example a number of airlines including United, American, Delta, Southwest, Alaska, and JetBlue received around $25 billion in aid from the federal government.

I don’t want to tell you what to think about how the government approached the stimulus, if you’ve been following my channel you may know some of this already. But in my view those measures went a long way toward preventing stock market disruption and propping up the economy at least temporarily. Of course it’s hard to say what the long-term consequences will be or when things will get back closer to normal, but a lot of really large companies would have been in even worse circumstances without the relief that was provided through the CARES Act.

4. Some industries are doing better than ever.

Now even though the economy is down overall, for example with respect to unemployment and GDP, coronavirus has had very different effects on different industries. So this point doesn’t apply to the stock market as a whole, but it does explain why certain stocks have performed well over the last few months.

Amazon is a great example here, more people are shopping online, so even though coronavirus has reduced consumer spending overall, some ecommerce companies have been generating even more revenue by taking sales away from brick and mortar businesses. And Amazon’s stock was hit by the initial crash in March, falling from $2,170.22 on February 19th to $1,676.61 on March 12th, that’s a drop of around 23 percent, so not as bad of the rest of the market fared during that time but still a pretty significant decrease.

But since then it’s had an incredible rally, on August 24th it closed at $3,307.46, which is an increase of 97 percent relative to how low it fell in March, so it has almost doubled in value. And Amazon posted outstanding results in both the first and second quarters which led to substantial increases almost immediately. When they reported their second quarter results after the market closed on July 30th, their stock went up by nearly five full percentage points after hours.

Other industries that are doing well right now include healthcare, video games, and liquor. So these fields aren’t enough to offset the losses in other areas, but they do help keep the stock market from falling as much as it would if every industry crashed at the same time. And I think we will see other industries start to recover over the next few months, we’ll also have to see how these industries will adjust to the new normal. Obviously some businesses that are closed right now will open back up in the future, but depending on how long the lockdown lasts these closures could continue to affect our economy for several years or even longer.

5. Interest rates are at rock bottom

Interest rates are extremely low right now and that tends to make stocks a more attractive investment. The Federal Reserve dropped rates all the way down to 0 percent in March, which makes it easier for banks to access money and at least theoretically stimulate economic activity.

That said, lowering interest rates can also have some other effects, particularly with respect to bonds. Basically what happens is that when interest rates go down, bonds become more valuable. This is just an oversimplified example, but if you could access money at 1 percent interest and invest it in bonds that are paying 2 percent, those bonds are more valuable than they would be if your interest rate was also 2 percent. Of course when they become more valuable that means people will be willing to pay more, which in turn brings prices up and cuts into the initial yield.

So it’s no surprise that 10-year Treasury bonds from the US government were down to a yield of just over 0.6 percent in early July. Now maybe if you could get bonds at 2 percent you would invest in those rather than taking on more risk in the market. But when bond yields are so low there’s less of an opportunity cost involved in buying stocks. Obviously the Federal Reserve knows all this, they saw what was happening to the economy, and at least in terms of stocks they were able to lead a pretty quick rebound considering how uncertain the market was in February and March.

Stocks are really complicated, I’m sure there’s a lot more I could write here, but I hope this article gave you at least some idea of the factors that tend to affect stock prices and why they can be so disconnected from the reality that many Americans are facing right now. In most cases there’s a closer connection between unemployment or GDP and market performance, but in this particular situation the things that are slowing down the economy aren’t having as much of an impact on stocks.

Now I want to mention that that could change quickly. If I could predict exactly where the market was going to go for the rest of the year then I’d be a lot richer than I am now, but at this point it’s hard to say whether stocks will continue to outperform other economic indicators. As always, thanks so much for reading, make sure to share your thoughts in the comments, and click here if you want to get two free stocks—Webull will give you two free stocks when you deposit $100 with one of those stocks worth potentially up to $1,400, so let me know what stocks you get, thanks again for reading.