Is the Market the Economy and Why Does My Coffee Taste Bad?

There have been a lot of confusing things about the past year: Will my kids ever go back to school? Have they been scarred psychologically? And WHY, even 4 months after my COVID diagnosis, does some coffee still taste like cough syrup mixed with aluminum foil?

These are the questions that keep me up at night.

But my clients…they have other questions. After a financially volatile year where we saw record lows and highs in the stock market all while hearing through media outlets that the economy was bad, many began wondering:

How is that possible?

 

“Though it’s been said, many times, many ways…”

The economy is not the stock market – but they are closely related. Broadly defined, the economy is the production and consumption of goods and services whereas markets in general are a place to buy and sell things. In the case of the stock (or bond) market, it’s a place to buy/sell ownership (stock) or debt (bond) of a company, government, etc.

But they are connected, with the markets moving based on the expectations of how the economy will look in the future – just with a bit of a time lag. Expectations of how the future economy (or company) will look 5 years in the future is less important – and factored into less heavily – than how the economy or company may look in 6 months (this is referred to as discounting future expectations).

 

Let’s Put this in COVID Terms.

When you were hoarding toilet paper and Lysol wipes (well, it certainly wasn’t me), you were anticipating a lack of availability in the future – so you purchased a lot of it at that moment- likely at higher than typical prices. While this didn’t exactly function as a “normal” market (we are talking about hoarding toilet paper after all) it did illustrate the impact supply and demand have on the price of goods.  Looking at supply and demand on a larger scale, if you anticipate the US (think – group of companies) will produce less goods and services (GDP-loosely) or a company will hit a rough patch (Americans suddenly aware of the limited use of 482 extra rolls of toilet paper) you would expect fewer people to purchase ownership or debt of that suffering business or country. 

Even during a pandemic, it’s important to remember that markets have historically gone up over long periods of time as economies continue to expand through improvements in productivity, worker output, inflation, etc.  It’s also important to remain focused on your risk tolerance and not adjust your investments based on the news cycle which is designed to get you to act based on fear and greed.  Keep the big picture in mind (click here for more about that) and focus on your long-term goals and things you can control.

Like changing your coffee if it tastes like aluminum foil.

 

This Might Help You Sleep Better.

Barring an existential threat to our economic system (in which case you probably shouldn’t be invested at all), now’s the time to focus on the long term. True, long-term investing based on your risk tolerance and objectives should only trigger one emotion: boredom.

If you’re looking at your accounts and wondering if they’re positioned correctly, let’s talk about it. Market fluctuations will happen, so the best way to prepare for the future is to have a professional take a look at your investments and make sure they’re serving your current and future goals.

In the meantime, I offer this advice: Turn off the TV, put the newspaper down and, for heaven’s sake, turn off your Robinhood app and stop trading. Go hoard some toilet paper if you get bored. And pick up some new coffee while you’re at it.