Buzz
You've probably noticed the economy isn't in the best shape. Consumer spending has dropped significantly, and unemployment rates keep climbing. Yet, the stock market seems to be... holding steady?
In April, both the S&P 500 and the Dow saw their most successful months since 1987.
Yes, it's perplexing. Honestly, any positive news feels strange right now. But let's break down some index fund basics:
The S&P 500 is an index that tracks stocks from 500 of the largest companies listed on the New York Stock Exchange or Nasdaq.
The Dow Jones Industrial Average is another key index. It monitors 30 well-known companies traded on the New York Stock Exchange and Nasdaq, such as Apple, Microsoft, and Walmart. Typically, it experiences its best month of the year in April.
By looking at the S&P 500 and the Dow, you can get a good sense of the stock market's overall health. But even though spring is generally a positive period for these indexes, why are they performing so well when the rest of the economy seems to be in chaos?
A part of the explanation lies in how you define 'best.' Just because the S&P 500 and the Dow saw gains in April doesn't mean their long-term performance has been impressive. It simply indicates they recovered (to some extent) from a tough March.
Take a look! Here’s a chart showing the S&P 500 (red line) and the Dow (blue line) over the last six months:
As you can observe, the indexes haven’t fully bounced back from the sharp drops that occurred when the pandemic’s impact began to intensify in the U.S. back in March. However, they are trending upwards, despite the daily fluctuations.
Then, there’s the way investors are forecasting the economy’s future. For example, we have:
The federal government and the Federal Reserve injecting funds into the economy. For instance, your coronavirus relief check is part of this effort to keep the money circulating.
Plans being rapidly developed to reopen various regions of the country.
Optimism. Investors buy stocks in anticipation of future returns, so they’re stocking up now, hoping for an economic rebound.
Investors believe that purchasing shares while the economy is down will yield substantial returns once things improve, even if that recovery is gradual.
Here’s the New York Times to provide further insight:
Markets typically rebound long before any tangible improvement in economic fundamentals is visible, as investors make decisions based on expectations for future outcomes rather than the current economic conditions. For example, during the last recession, the stock market reached its lowest point in March 2009, but the unemployment rate didn’t begin to decrease until October of that year.
A strong rally in the S&P 500 doesn’t guarantee that the stock market will continue on this upward trend for the next few months. The true effects of the pandemic on the economy for the second quarter are still uncertain, but it’s expected that GDP will continue to decline. Unemployment could average around 14%.
Your index funds will experience both gains and losses. Your portfolio, if you’re brave enough to check it now, will have both good days and bad ones. Remember, when an index fund has its best day, week, or month, it’s just a historical milestone for the average investor. It’s not a reason to alter your personal investment strategy.
