The market is on a tear and the economy is in the dumps. So why do so many people believe the market has decoupled from reality?
The economy is bleak, local, personal and not publicly traded, for the most part. One wonders how this is not reflected in the major indexes such as the S&P 500. Fact is, the most visible and economically vulnerable industries are also among the smallest, based on their market capitalization. When a Payless, Lord and Taylor or Brooks Brothers files for bankruptcy, the world notices. But those companies and their sectors hardly show up as a blip on the radar.
Stocks that are truly boosting the markets – in particular, Amazon, Apple, Facebook, Google and Microsoft comprise over 20% of the weighting. These companies garner most of their income from international markets, not to mention the boost to their sales through COVID. Stay at homes use all these internet based services, setting record stock prices, even in this pandemic. It appears surreal and almost unethical that companies could benefit from such dismal times. But it makes total sense. Netflix has never been stronger in this lock down situation. Most now officially shop online, hence record growth for Amazon, while J. C. Penny is sent home packing.
One can argue how the market reacts to be good or bad but one thing the market is not, is irrational. It is very much connected to reality of market capitalization. How to trade it? Put your feeling aside; nobody cares. Instead, follow the money!
Head Trader Hugh Grossman