How the Hell Did Stocks Have Their Best Month in Two Decades?
You’ve probably noticed that the economy isn’t all that hot. Consumer spending has plummeted. The number of unemployed continues to grow. But in the stock market … is everything okay?
April had the best months for the S&P 500 and the Dow since 1987.
Yeah. This is confusing. To be honest, any good news is confusing right now. But let’s dive into the basics of an index fund:
The S&P 500 is an index of the 500 largest companies listed on the New York Stock Exchange or Nasdaq.
According to the New York Times, the index is now supported by Microsoft, Apple, Amazon, Alphabet (which is Google) and Facebook. This is not surprising: they are all tech companies, and since we are at home most of the time, we spend a lot of time embellishing our devices.
Another index is the Dow Jones Industrial Average. It tracks 30 well-known companies listed on the New York Stock Exchange and the Nasdaq. Apple, Microsoft, Walmart – you get the point. This is usually the best month of the year – April.
If you look at the S&P 500 and the Dow, you can get a pretty good idea of the health of the stock market. But even if spring has historically been a rather favorable time for these indices, why do they perform so well when everything else is a giant cluster?
This is partly how you shape the “best”. The fact that the S&P 500 and the Dow rallied in April does not mean their long-term performance has been stellar. It just means that they have recovered a bit from the dark march.
Look at it! Here are the S&P 500 (red line) and Dow (blue line) over the past six months:
As you can see, the indices have certainly not recovered from the initial dips that took place when the pandemic rose in severity in the US in March. But they are moving in that direction, despite the daily twists and turns.
In addition, investors are looking ahead to the economy. For example, we have:
- The Federal Government and the Federal Reserve System are investing in the economy. Is your coronavirus test? This is part of the effort to keep the money flowing.
- Plans to open up part of the country are being quickly developed.
- Optimism. Investors buy stocks as a way to make future profits, so they stock now, expecting the economy to start to improve.
And investors think that buying stocks during a downturn will bring them exponential benefits when things improve, even if progress is slow.
Here’s an explanation from the New York Times :
Markets tend to recover long before any actual improvement in fundamentals becomes evident, as investors buy stocks based on expectations of what will happen later this year rather than current climate conditions. During the last recession, the stock market bottomed out in March 2009. But the unemployment rate did not begin to decline until October of that year.
A good rally for the S&P 500 does not mean the stock market will decline in the next few months. We do not yet know the true impact of the pandemic on the economy in the second quarter, but GDP is expected to continue to fall. Unemployment can be close to 14% on average.
So, your index funds will have both gains and losses. There will be good days and terrible days in your portfolio, if you dare to look at it right now . Keep in mind that the index fund that has the best day, week, or month is just a historical marker for the average investor. This is not a reason to change your personal investment strategy.