Shifts in our daily lives both at work and at home, which perhaps may now be one and the same for many. For some, there has been loss; of a job or a business, of a loved one, of a sense of normalcy. Our national economy has been hit hard with historically poor numbers in the areas of job loss and GDP It goes without saying that 2020 has been a year unlike any other. Most of us have experienced massive growth.
Yet when you see the U.S. stock market performing the way it has during the last several months it can lead you to believe the market is no longer in touch with reality. While this is a perfectly understandable opinion, we’re here to explain why this is simply not the case. As we’ve said before: the stock market is not the U.S. economy and vice versa. Here are a few things to know about the stock market’s performance.
The significance of market capitalization
One concept that helps clarify why the stock market operates the way it does during economic downturns (especially during this one) is market capitalization. Market capitalization is the total dollar value of all outstanding shares of stock of a company. Many of the industries that are currently suffering make up very small percentages of the S&P 500 stock index based on their market capitalization.
For instance, airlines, which are among the hardest-hit industries, make up just short of .20% of the S&P 500[1]. When we include other struggling industries such as department stores, travel services, resorts and casinos, and oil and gas, we learn that while these industries have a much larger impact on the economy, they do not have a very significant impact on capitalization-weighted indexes such as the S&P 500.
The big role of Big Tech
The Big Tech companies have been driving nearly two-thirds[2] of the market capitalization growth in the S&P 500 since 2015—long before the coronavirus came into play.
Due to the pandemic and various economic shutdowns around the world, Big Tech companies have experienced significant growth. As global companies, their revenue is not entirely dependent on success in the U.S. alone. The sectors of the market these companies represent—software engineering, internet retailers, consumer electronics, and internet content—make up nearly 25%[3] (roughly $35 trillion) of the total market value of the U.S. stock market capitalization.
So, because the Big Tech companies have seen substantial growth in 2020 and hold such a heavy market capitalization weighting in various stock indexes, they have buoyed the recovery in the stock market from the lows of March 2020. This is all despite dire economic statistics involving GDP, unemployment, and bankruptcy filings that are quite literally off the charts[4] from a historical perspective.
Not convinced? Reflect on your reality
Think back on the last 5 months: Have you purchased more items online? Have you had to upgrade your Internet service to accommodate more users, or subscribe to virtual meeting platforms? Have you added additional streaming services for entertainment purposes? Have you purchased additional computers or devices to accommodate working remotely and/or virtual learning for students in your home? When we reflect on the life changes we’ve experienced, it’s easy to see how Big Tech has achieved its market-buoying growth.
What can we expect in the coming months?
Now if you’re saying, “Okay, I understand what’s behind the stock market’s performance, but what about the election in November?” We are glad you asked! Keep an eye out for our next blog that takes a closer look at how presidential elections have historically impacted the stock market and economy along with our view of the 2020 election.
For now, here are 3 tips to remember about the economy and the U.S. stock market:
- The stock market is not the U.S. economy and vice versa.
- Market capitalization weighted indexes are driven by the largest companies in the index, and these companies make up a large portion of the total index.
- Your specific goals and tailored financial plan take precedent over short-term market conditions. This is why we recommend reviewing your plan at least once a year.
Stay on track toward your goals.
If you have questions about your investment strategy or would like to explore how Varra can create a personalized roadmap for you, please contact our office.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
[1] Fidelity Investments, Market and Sector Analysis, July 27th, 2020
[2] The Sunday Times, July 5th, 2020, article by Mark Atherton
[3] Fidelity Investments, Market and Sector Analysis, July 27th, 2020
[4] U.S. Bureau of Economic Analysis August, 24th, 2020
