Why Wall Street Valuations Do Not Reflect Main Street Economic HardshipsSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on July 7th, 2020
By Bob Reby, CFP®, July 9, 2020
The following article is The President's Letter from the Summer 2020 Edition of the Reby Advisors Newsletter.
Has the disparity between Wall Street and Main Street ever been wider?
Forty six million Americans lost their jobs.1 More than 100,000 small businesses permanently closed.2 And the Federal Reserve recorded the largest monthly decline in U.S. industrial production ever.3
Yet the S&P 500 only recorded about a 4% loss in the first half of 2020 – a very ordinary level of fluctuation during a period of extraordinary economic challenges. Moreover, since March 23rd – the day after New York issued a stay-at-home order and the day Connecticut started its lockdown – the S&P 500 has risen 39%.4
Is this good news for investors, or is it a sign that stocks are overvalued? A case could be made either way.
When states issued stay-at-home orders in March, the market reacted negatively in anticipation of massive job losses, negative economic growth, and poor earnings. As those events materialized, however, the market barely reacted: investors had already priced in the bad news.
The prices of securities reflect investors’ forward-looking expectations for economic activity, interest rates, corporate profits, and other factors. That is why any signs of a “second wave” that could stall a recovery have caused some extremely volatile days, like the near 7% drop on June 11th.
Strong market performance of late indicates that investors, overall, believe the worst is behind us. I certainly hope they are right – but we will be prepared either way. In the short-term, markets will likely overreact positively and negatively to news of businesses reopening, new COVID-19 cases, and the development of treatments and vaccines.
As you know, I believe that your “real money” should be in a diversified portfolio aligned with your short- and long-term goals – because I believe that being a long-term optimist is the only rational perspective! And we will continue to look for opportunities to take advantage of the mistakes of other investors who lack this long-term perspective.
Most important, I hope you remain healthy and safe. We are grappling with an economic and a health care crisis, not to mention civil unrest. If you have questions or concerns, please do not hesitate to reach out to me personally or your advisor.
To download the full Summer 2020 Newsletter, Click Here.