JUST PLAIN TALK: Why stocks rise in a horrific pandemic

Buz Livingston
Walton Sun
I don’t know, but I have some ideas. Before we go farther, the human brain evolved by extrapolating random events with specific outcomes. In Jason Zweig’s stellar book “Your Money and Your Brain,” he cites Dartmouth College research that shows a part of our brain works to find patterns and casual relationships even when none exists. The constant search for data helps solve simple problems, but with complex or random situations, researchers believe it’s “not a good thing.” Zweig is blunt, calling it the “investment understatement of the century.”
For example, an explanation floating around the internet is rising COVID-19 counts have jaded investors.
On July 1, the total number of confirmed cases approached 3 million, but the S&P 500 rose for its fifth consecutive day, the longest winning steak of 2020. Another Twitter post linked the rise in the S&P 500 to the divergence in the record number of new cases and the lower number of deaths. In a message that didn’t age well, one advisor claimed Texas had an 80% chance it was past its peak.
Like many others, advisors should stop moonlighting as epidemiologists and stick to their knitting.
These explanations ignore a salient point. An evaluation of 401K plans at Vanguard and T. Rowe Price shows investors made scant changes earlier this year. The average investor saving for retirement is standing pat and continuing their regularly scheduled contributions.
To me, it’s pretty simple and has nothing to do with the virus. Like Deep Throat said, “Follow the Money.” Mr. Throat issued that adage when I was a young man, and it’s stood the test of time. The S&P 500’s rally is extraordinarily narrow, led by a handful of stocks. Twenty percent of 2020’s growth is tied to five stocks, Facebook, Google, Amazon, Apple, and Microsoft. These companies are particularly suited to the Information Age and relatively unscathed by the pandemic. Historically, rallies led with narrow breadth have median longevity of three months, but the longest lasted over two years.
More importantly is the role Federal Reserve is playing. In March, the Fed decided they would do whatever was necessary to keep the economy afloat and flooded the economy with money. Should more have gone to households and less to buying corporate debt is worthy of debate. COVID-19 forced the Federal Reserve to take Modern Monetary Theory (MMT) baby steps. Initially, I was quite the MMT skeptic, but I’m MMT curious now. We have a fiat currency, and we can use it for good or bad.
Whether you like or loathe MMT, the worst thing the government could do now is to enforce austerity.
The stock market is a forward-looking indicator, and the amount of money from the Federal Reserve and the CARES Act bodes well for equities, particularly those insulated from the pandemic ... at least for the short-term.
You can’t always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit or drop by 2050 West County Highway 30A, M1 Suite 230.