There are about 600,000 Irish people claiming Covid 19 benefits in Ireland. In the US, an estimated 30 million people have claimed for unemployment benefits, which accounts for 18.4% of the working population. Businesses all around the world remain shut with people unable to get their hair cut, go clothes shopping, trade up their car or go on holiday. But while all this is going on, the stock market is increasing in value after its fall in March. How is that? Because the stock market isn’t the economy.
My dog Benji loves going for a walk. Every weekend, we go on the same walk up to Barnaslingan Woods where he has a good run. We go the same route all the time, I walk on the pathway, Benji runs off all over the place, distracted by smells, birds or other dogs. But he knows what way he is going and we are both going the same way, kind of. I am the economy. Benji is the stock market.
The stock market is nothing more than a place where people can buy ownership in companies. Some are making short term bets on the value of these companies. Others are making long term bets. If you are not listed on one of these exchanges, the general public or large institutions cannot buy into your company.
The stock market is dominated by insurance company and large institutions. Think about your pension funds. You pay in your monthly contribution and that is added to all the other policyholders contributions. The insurance company now has millions to invest instead of just your few hundred euro. These funds can still invest in the markets no matter what the economy is like.
There are lots of different factors that can influence the stock market; unexpected can take many forms like changes in legislation, natural disasters, geo politics, interest rates, fiscal plans, economic growth, employment rates. It is impossible to know the exact influence that any one issue will have on stock markets or if they will have any influence at all. Since this crisis began, the S&P 500 has grown on each Thursday when the US has announced ever expanding unemployment rates.
Markets are also forward looking and it is unexpected events that drive future prices. Whether that future news is good or bad doesn’t matter, what matters is whether it is better or worse than was already expected. And we only find out with hindsight. Like did the market expect unemployment figures to be higher than announced, so when lower numbers are announced, the value goes up?
The economy is a lot simpler. It is the production and consumption of goods and services that are needed by the people, companies and governments in a region or country. You do not need to have your business listed on a stock exchange for your good or service to be relevant to the economy.
Most economies are what is known as market economies where consumers and producer determine what is sold and produced. And this is where we are currently in trouble. People aren’t going on holidays, taking flights, buying petrol, going to shows, concerts, restaurants, pubs, sporting events.
The longer that this goes on, the more people will hold onto their cash and people will spend less than before. This will eventually impact on the stock market i.e. Benji will catch up with where I am going.
If you have any questions, drop me an email at steven@bluewaterfp.ie