I am not a big fan of scary movies. You know, the ones with the guy in the hockey mask or the girl with the head-spinning thing; that’s just not for me. If I’m honest even just typing those words made me cringe at the memories of seeing those scenes. But there’s an analogy going on between those films and the economy and the stock market. Bear with me, and I’ll explain (hint: it’s not scary).
In those movies, there is a point in which you realize something really, really bad is about to happen. It’s that “oh boy, this is going to be very terrifying” type of moment. Physiologically, some people might experience an increase in heart rate, dryness of mouth, eyes watering or goosebumps. The emotion known as fear is palpable, and we’re anticipating something but we have no idea what to expect.
Some would say (I can’t) that the best horror film keeps this feeling “alive” in you for as long as possible–drawing you in, and keeping you engaged and fearing the absolute worst. Then there is that point that we’re let in. We see the monster, or the face, or the ‘thing’ coming out of the TV and it’s in front of us. It’s at this point that something begins to change. It might be scary, but we know what we’re facing now–it’s in front of us, and there’s almost a sigh of relief as we begin to adapt to a new phase of the film. Some might say “this isn’t really that bad” and the heart rate returns to a more normal pace and the goosebumps subside. Things still need to be dealt with in the movie, but we at least know what we’re dealing with.
How are the economy and the stock market similar to this? Recently, we were exposed to some of the worst economic news in US history. I’m sure you’ve been hearing about it: weekly unemployment reports started to come out, and what was normally a number in the area of 200,000 or so per week skyrocketed to over 3 million in week one, almost 7 million in weeks two and three, and April 5-11 was over 5 million (source: Department of Labor). To put this in context, those were the worst jobless numbers that we’ve ever seen.
That was the economic news. But what about US stocks? In the last month, beginning with the release of these numbers, we’ve witnessed two of the best seven weeks on record for the Dow (30 largest US stocks). How is this possible? Like in the horror movie example, the market got to see the monster. After weeks of anticipating what could (and probably would) happen, the market declined in a big way. The fear was most high as it anticipated what could be really, really bad. Then, it finally came face to face to the reality and the actual news. And by that time, in its “mind” at least, a really bad chapter of the movie was already over.
The market is very efficient at quickly digesting available news and moving on it. Unlike the movies, however, it does so very quickly, and when we least expect it. It doesn’t linger in the fear–it anticipates and reacts fast. The market is referred to as a “leading indicator”, and often is the first to lead us into recoveries. The economic news, however, is a “lagging indicator”. By the time we receive economic reports, it’s behind us and has already occurred. This is why we can have periods like in the last few weeks with record-breaking stock markets while we’re reading about how bad the condition of our country is in. It’s also why we usually recommend not changing a portfolio during times like those. See this video (here) from Larry Swedroe, posted on March 27, for more on how markets react to economic news.
This in no way is to say that the movie is over. It is just hopefully a helpful analogy to explain how the market and the economy are different and how attempting to find the best time to buy/sell is (still) a fool’s errand.
Investing involves risk and you should consult with your advisor when it comes to anything related to this article.
Pete Dixon, CFP®
Partner and Advisor