Say you see someone in really bad shape, someone who’s limping with a cane, obese, and struggling mightily just to walk a few steps. It looks pretty awful, and you might think that person’s future appears grim.
But you don’t know the full story. Yes, it’s possible that person is in decline, but it’s equally possible that they’re on an upswing. What if our imaginary person were recovering from an accident and had previously been unable to walk at all? What if they were also doing rehab exercises and had already lost 50 pounds?
All of a sudden what seemed really bad looks really good.
So it is with the U.S. economy.
The recession is over. Recessions don’t end when the economy has fully recovered. They end when things stop getting worse and start getting better.
Officially, the Bureau of Economic Cycles won’t tell us the recession is over until we get two consecutive quarters showing economic growth. Once we have that, they will go back and try to figure out which month the recession ended. Was it in April? May? June? It will be interesting to find out, but the point is, it will almost certainly be a time earlier in the year.
Over the Labor Day weekend, hotel occupancy was around 50 percent across the country. That’s not a great number, but it’s miles better than it was in May. TSA tells us that on that same weekend, air travel was down roughly 60 percent from last year. That’s really bad, except it’s a lot better than when we were down about 90 percent back in April.
The recession is over, but things aren’t good yet. The United States economy is still recovering from an accident. We’re still walking with a cane, struggling up those steps. But we are making progress.
If you didn’t read any news at all and only looked at stock prices, you’d think the economy was humming along at full capacity. Don’t let this confuse you. The stock market is not inaccurate, it’s just early. And that’s completely expected.
Investments are made in the hope of future returns. Here’s an example. Say a friend comes to you and asks to invest with him to open up a coffee shop. He’ll run it and you’ll just put up the money as a silent partner. The money you give him buys you part ownership of a coffee shop that has not yet opened, that has no customers or sales. But you invested because you believe all those things will happen—and that you will make money in the future!
It’s been said that the stock market looks roughly nine months ahead. That estimate seems probable, but it’s also likely that the amount of time investors look into the future varies considerably. If we assume nine months is more or less correct, then investments being made today are based on expectations for June of 2021.
By then, most of us think we will be out of the pandemic, and if the economy is not fully recovered to pre-COVID levels, it should be well on its way.
Of course, we can’t know the future with 100 percent certainty. And because we invest for future return, we can never be 100 percent certain of the outcome.
If all vaccines fail and the pandemic continues to roll on, then today’s stock prices are far too high. But if we beat this thing in the expected time frame, then stocks may be where they should be.
So where will prices be when we get there? I know this much—they will be at a level that makes sense relative to expectations for sometime in 2022.
In other words, what appears to be a disconnect between the economy and the stock market really isn’t one. It’s just two different time frames. The economy is now. The stock market is the future.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/ Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results. Indices mentioned are unmanaged and cannot be invested in directly.