During the current economic crisis, it is easy to see reasons to sell stock.
The S&P 500 is a market-capitalization-weighted index of 500 of the largest publicly-traded companies in the U.S. and is usually what traders use to gauge the overall economy.
The S&P 500 seems to be hitting new highs despite poor employment numbers. In May 2020, we had a little more than 14% unemployment while now we have about 6.7%. In February, it was at 3.8%, which is more or less indicative of our normal economy.
In the midst of the pandemic in May, the market was at 2830.71, while today, it is at 3672.82. In February, the S&P 500 was at 3248.92.
Looking at this data, we can see that the market is now stronger than it was pre-coronavirus despite jobs not returning to normal.
Why is this?
Well, it is important to note that the S&P 500 is weighted. Technology, communications, and healthcare represent just under half of the total value of the index. Amazon, Apple, and Microsoft make up more than 15% of the index’s value. These companies are actually profiting off of the pandemic.
Despite people struggling and many are falling into poverty. According to a study by Colombia University, 8 million Americans have fallen into poverty. This shows the errors in using a market index or even GDP to gauge the wellbeing of a population.
As a result, it is natural to look at the investing stories that come out every day and want to pull out your money. Most of the titles say “Bear Market Coming,” “S&P Rallies Despite Poor Employment Records,” and “When Will the Bubble Pop.”
Many finance savvy people I know moved their retirement funds and investments into money market funds (kind of mutual fund that invests in highly liquid, near-term instruments. These instruments include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity. Money market funds are intended to offer investors high liquidity with a very low level of risk.)
The problem is that these have such low yields and the average rate right now is .10%. Basically, they are there just to shift your funds during times of turmoil. You lose on inflation, but at least you don’t lose in the general loss of capital in the market.
But I say this is a bad strategy because you never truly know how the market will shoot back up. Historically it always does. You stand to lose a lot more in capital gains than you will save eating the losses with a money market mutual fund. That is unless you are some super-intelligent finance expert who can time the market to a tee. Most of us aren’t though.
Wells Fargo recently ran an investment experiment where they had four hypothetical investment scenarios in the bottom of the lows in March. One account increased exposure by 30% in stock, the second investor maintained their positions, the third reduced stock, and the fourth exited stock completely. The result was that the investor who increased stock exposure outperformed the other groups by 4.7%.
Of course, no one can predict the future. But it was pretty obvious that the federal government would inject liquidity into the market to keep it afloat. It was also apparent that the crisis would temporarily handicap certain industries like travel and oil. Most of these have now increased a lot from their March bear lows. Even in instances where there is no artificial reduction of the market like Coronavirus, it can still be expected that the markets will always go up in the long run. This is why we shouldn’t pull out of the market and instead stay in and brace the storm.