Stock Market Surge During Economic Downturn: What it Means
More than a million New Jersey residents have filed for unemployment benefits since the start of the COVID-19 pandemic in March. The national economy continues to struggle mightily and other countries around the world are also facing extreme financial hardships because of virus-related lockdowns. But you’d never know it by looking at the action on Wall Street.
Even though the United States is climbing out of the most severe economic downturn since the Great Depression, the S&P 500 stock index has shot up more than 50% over the past six months.
According to Ken Kamen, the president of Mercadien Asset Management, while the Dow Jones Industrial average is up in record high territory, the market averages are being driven by a half-dozen multi-billion-dollar technology companies.
"But it’s not really reflecting what’s going on underneath," he said, explaining that more than 40% of the market is still trading at 52-week lows.
He said what we’re seeing is a rally in a specific sector of the market.
“People have to recognize when they see the averages, it’s not necessarily saying what’s happening in the entire market," he said.
The stock market used to be looked at as a reflection of the American economy, but Kamen said that’s no longer the case.
He pointed out that technology has become front and center because we’ve been spending so much time online at home lately. So-called “stay at home” companies like Apple, Netflix and Zoom are strong right now while travel, hotels and entertainment companies are struggling.
“But at some point, when we get some sort of vaccine or an all-clear sign, you’re going to see that start to reverse itself and you don’t want to be positioned in just one end of the market," he cautioned. "It’s a time for people to be looking at their allocations and diversifying and maybe paring out some of the things that they have big gains in.”
He said there is also another factor involved in the recent success of the market. When COVID hit, the fear in the market was that liquidity was going to dry up and investors would not be able to sell the stocks they needed to.
“Lo and behold, the federal government and the Federal Reserve came in and helicoptered money into every corner of the market,” he said, relieving the anxiety of many market participants.
With interest rates in the bond market extremely low, investors have little choice but to invest in the stock market to realize any real gains.
“You can’t necessarily be happy with a half a percent, so you're searching for things that can produce more return. So that’s one of the reasons I think the stock market is doing very well," he said.