Join Austin Hagaman and Ryan Fause for a conversation on the disconnect between the surging market and the economic slowdown.
Ryan Fause: Hi guys, we are here today to highlight the recent article we posted to our blog on WithumWealth.com that reflects on the recent disconnect between the surging stock market and the economic slowdown.
Austin Hagaman: Thanks Ryan Fause. We entered 2020 with a seemingly good economy. Then COVID-19 arrived sending the S&P 500 index on its quickest decline in history. Well since that point, we have retraced some of those loses. The economic data is still weak, and the certainty remains high.
Ryan: Very true. This has been a core conversation piece with clients. The divergence between weak economic data and the stock market’s performance is not unusual for times like today. This is particularly true because the stock market is forward looking and being priced according to the prospect of what the future holds while the economic data is backward looking. So, from a forward-looking perspective, we have definitely made progress since this pandemic started. States are starting to open up their doors for business, local streets in Red Bank and in other towns have been closing to make room for outdoor dining. It’s almost like Paris, France is coming to New Jersey and other states.
Austin: This is very true. The Federal Reserve and the Government really do deserve credit in helping to create an economic bridge to better times. It’s remarkable actually that many global stock indices have bounced back so quickly. What do you think about the tech-rich NASDAQ 100 and how it’s now in positive territory for the year?
Ryan: Well the NASDAQ 100 is very tech heavy and is also market cap weighted. So, for both reasons, it may not be the best gauge of the total economy. Smaller publicly traded companies offer a very different perspective as well. If we look at a small cap index or even an equal weight S&P 500 index, we see it improving but at a slightly more muted pace. We reviewed a great chart recently showing the relative valuations of the tech-heavy NASDAQ 100 and the S&P 500. They are at levels not seen since 1999 during the tech bubble.
Austin: Yes, and we would argue that valuations today would reflect a different world than back then. Today’s tech companies have stronger balance sheets, stronger missions and are not built up on that same 1999 euphoria in our view. But this is still an interesting observation worth watching as we need to judge the sustainability of technology-oriented performance.
Ryan: Also true. So, the time-tested approach of diversification may serve investors very well in the months and quarters to come. Portfolio construction requires looking ahead and today that is somewhat more challenging than usual.
Austin: Well thank you Ryan. This has been a great conversation. I would just like to say to all participants – please feel free to reach out to us with any questions and comments. I hope everyone remains safe and well.
Ryan: Thanks Austin. If any of our viewers want to dive a little deeper into this topic and maybe some other wealth management related articles, please check out our blog at withumwealth.com/knowledge. Thanks again, stay safe everyone.
COVID-19 or 91-DIVOC: Reflecting on the Wall Street-Main Street Disconnect