Stock Market Vs. The Economy

The stock market has been on fire. Rocketing up over 50% from the March lows taking the S&P 500 to new highs. This recovery has been the fastest - and for many the most puzzling in history.

"Businesses can't open, millions lost their jobs and the pandemic rages on. Stocks don't make any sense!"

There's a common misconception that the stock market and the economy are one and the same. While they're related, key differences explain the negative correlation we're seeing.

Where You Looking?

Economic data is backwards looking. It tells you historical results. Stocks are forward looking. Investors make buy and sell decisions on future expectations.

If investors believe stocks will thrive again, then despite damning economic data, they will buy and markets will rise. The reverse is also possible. If GDP and employment is at all time highs but if investors believe we've peaked and starts selling, markets will dive.

Keeping Things Private

Your local gas station, corner store, and sushi restaurant don't trade on the New York Stock Exchange. These are private companies that will never IPO. The stock market only has public companies, representing only a small fraction of the total businesses out there. There are about 600K businesses in the US with 20 or more employees, less than 1% of them are publicly listed.

Private businesses were hit hard by the pandemic. Many haven't recovered and many never will - this is not reflected in your portfolio.

Big Winners Win Big

Even the struggles of most public companies are not reflected in the stock market. Despite the new highs, most stocks are still struggling to get back to pre-pandemic levels.

The market is dominated by a few extreme winners. The top 5 companies in the S&P 500 represent 20% of the index and their amazing performance have made up for the struggles of the rest. The small group of big winners are masking the big group of small losers.

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Herman Ye

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