The market has been rising recently as hopes for reopening the economy and massive stimulus drive buyers to put idle cash to work. There seems to be little concern about massive unemployment, the fact that many businesses may never reopen, and the changes that are taking place to the economy. Even though growth is very likely to be slower in the years ahead, the market doesn't seem to be pricing in that issue.
The market indifference to the economic challenges has created a huge amount of skepticism and it is that skepticism that is helping the market to trend higher. There are many astute investors sitting on the sidelines convinced that the economy has to matter at some point and that stocks will have to pull back, but when it doesn't happen the fear of missing out kicks in and they hold their noses and do some buying.
The great challenge of the market isn't identifying factors that might have an impact, but timing when they might matter. There is no question that a slowing economy will eventually be priced into the market but no one knows when or how that might happen.
Back in February, we had a particularly good illustration of how outside forces can be ignored by the market when it is seemingly obvious that they should matter. The coronavirus was raging in Asia and China was totally shut down for weeks as the U.S. markets trended higher and the indices were making new all-time highs.
The coronavirus was no mystery and it was inevitable it would have an impact on the U.S. but the market simply shrugged and pundits looked for other explanations for the resiliency in stocks. Typically the Fed receives the credit when stocks are going up despite some obvious negatives -- and that was the case in February.
Then suddenly one day the coronavirus mattered and the decline began. There wasn't any clear reason why the reversal began on Feb. 20, 2020 but that was the day that the turn started.
The lesson here is that the only way to time when something like the economy or a worldwide pandemic might matter is to focus on the price action. It may seem illogical that there isn't more concern right now about unemployment and the pace of recovery but trying to figure it out is a thankless task.
The market simply is not a rational beast at times. It is more emotional than analytic and to navigate it effectively requires that we understand we are at the mercy of its whims. There will suddenly be a day it will care about the important things it has been ignoring and that is when we have to be ready to react swiftly and decisively if we wish to profit.
We have some minor weakness Thursday morning on concerns about the U.S. relationship with China and some comments in the Fed minutes contemplating a second wave of Covid-19 later this year. However, the dip buyers are already showing up and the concerns about economic weakness are being shunted aside.
The economy will matter to the stock market at some point, but we don't know when or to what extent. All we can do is stay vigilant and be ready to react as conditions change.