What does the Volatility Hold?
Updated: Jun 8, 2020
One of the biggest questions I get lately is, “Why is the stock market rebounding while unemployment is skyrocketing?” The simple answer is the stock market is all about expectations for the future, not what is always happening at that moment.
Last year I became overly concerned that the bull market was nearing an end and was suggesting to our clients that we move some money to safe ground. Often their reaction was, “But unemployment is so low. The economy is doing great! Why wouldn’t we buy MORE stocks?”
Because the number one rule for investing is to buy companies that are profitable. For most firms, their number one expense is payroll and for the past several years, payroll had been getting more and more expensive as the job market grew tighter. And history has shown us, when labor markets get this tight, a correction is in the future.
Keep in mind, when you buy stock in a company, you are buying the future of the company and its future profits, not the past. So, if payroll and other expenses are going up and the company cannot increase the price to their end user, the profit will decline, and the company will be worth less (Stock price declines).
Along comes the Corona Virus and completely upends our world. Millions laid off- many with some form of unemployment assistance- and many people without any means or savings. The stock market HATES uncertainty and immediately plummets. It plummeted because it did not know how companies would rebuild or attract clients back. But as the last few months have played out, some companies have been able to continue business and their revenues. Of course, some have not. This virus has wreaked havoc on the already fragile retail sector. Shopping as we have known it will be changed forever. The retail stores that survive will be innovative coupling a boutique shopping experience with the ease of online buying.
As these companies adapt and change, the stock market releases a sigh of relief. The world is not completely ending just changing. There will be companies going bankrupt, some will be left to the dustbins of history others will become new global leaders. Remember Nash Automotive? Me either. It was a Dow 30 component in 1929 and now just a Wikipedia entry.
New companies will emerge from this tragic event. Zoom, who was used primarily in business before the virus, is now hosting family reunions and conferences across the globe. Yes, even my 93-year-old father has been on a zoom meeting. And he was born BEFORE the stock market crash of 1929. Yikes.
What you can do know is assess your current situation. Do you have enough safe money to ride out several months of loss of income or uncertainty? We could have more volatility in the fall as there is potential for a second wave of virus and an election year. Use this summer calm to get organized and prepare for future volatility.