“The Market” Vs “The Economy”


In a recent AWM Insight‘s we discussed – now with election day behind us – the immediate moves we should make to ensure portfolio viability in 2021. Here is a breakdown of the 4 key takeaways from the episode:

  1. US Markets are extremely efficient and price in new information immediately. Look no further than the election and the likely split government. As election results changed and the likelihood of tax rates staying put increased, markets adjusted quickly to the new reality. Then with the vaccine news, the market which had been partially pricing in a vaccine, jumped on the news of the 90% vaccine effectiveness from Pfizer and how quickly it could be coming. If you are reading or watching the news and think you can trade with any advantage you are already too late. The market has already adjusted to that new information.

  2. The stock market is not the economy. The equity market is the collective wisdom of market participants all discounting the future cash flows of thousands of public companies. It does not measure the current state of the economy. This is why the market can hit all time highs during a pandemic that wrecked the global economy. Many of the hardest hit companies and businesses are not public companies or are so small they have limited effect on the major indices. Erik Averill explains “On previous podcasts, we have been trying to bring into crystal clear view, there’s more than just who the President is that’s going to move markets, we have strongly tried to say that returns are detached from short-term news of who is going to be in the White House. Just to point out, we are seeing the best week in the market since April and we are in the middle of a pandemic.” The market is forward looking. It does not care about the current state of the economy. It is discounting the future turnaround of the global economy when a vaccine is widely distributed and businesses current cost cutting will drive leaner companies with dramatic earnings growth.

  3. As we’ve discussed previously focus on the long term plan. “Plan. That’s the key thing there, if we’re all focused on short term movements in the markets, then, I hate to tell you but you’re probably not in a very good spot. If you’re not a long-term investor, if you truly haven’t set up your plan to be a long-term investor then you should be nervous right now. If you’re relying on the market going one way or another, in the next couple weeks, months, then that’s a difficult place to be in, an unrealistic place to be in, you’re essentially gambling.” – Brandon Averill. Investors that suffer from short-term thinking consistently underperform the market and often do permanent damage to their financial situation. Aligning an investors financial structure with the outcomes they desire is where an advisor can create the most value.

  4. All investors should be constantly reminded of the core tenets that are proven to work throughout time: “As an investor, the good news is, you don’t need to increase the risk of guessing which individual company may or may not survive. We are betting on business going forward – take a step back, stop adding risk to your portfolio, start going to things like diversification, lower expenses, maximize after-tax returns, participating in what the market has for us rather than relying on that crystal ball.” Erik describes what investors should be focusing on. Wall Street generates consistent profits on the “hot stock tip” mantra. This illusion of control by “stock pickers” is a detriment to long term investors. Don’t be fooled by false shortcuts to wealth.