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What Is the Economy?


Economic Health in Terms of GDP and Employment 


What Is the Stock Market? 




The stock market and the economy can display very different pictures of “progress", as illustrated below. One such example is with COVID-19. In regards to the stock market, the major indexes including the S&P, the DJIA and the Nasdaq Composite index all have surged since the market downturn in March.6 On the other hand, GDP decreased by five percent in 2020’s first quarter, and as of June 2020, the number of unemployed individuals rose to 12 million since February. 7,8 

Why is there such a disconnect? A few reasons below.

Reason #1


Reason #2


Reason #3



How you manage your portfolio will impact how you react in times of turmoil

Does the disconnect between the stock market and the economy have you worried? Are you concerned about how your reaction to another pullback may affect your portfolio?  Here are three steps to take:

Step #1  Review your investment philosophy

Do you know what type of investor you are.  Are you an active investor or a passive investor?  Are you trying to match a benchmark or are you trying to outperform it?    Are you trying to grow your wealth or preserve it? Do you understand your overall financial picture, including your goals, and know what your portfolio needs to do? 

For example, if you are a passive investor who is focused on managing costs rather than beating the market and you have a buy and hold philosophy, you should likely be invested in low cost, passive index funds in portion to each asset class relative weighting global.  However, if you are invested in high-cost, theme-related ETFs  (Exchanged Traded Funds) concentrated in the US technology sector, you probably need to review your investment strategy.

Your investment philosophy doesn't need to be complicated but you should establish one prior to investing or making any significant changes to your portfolio.  

Step #2 Review your risk tolerance

Do you know your risk tolerance?  Do you know how much risk you are comfortable taking?  Did you invest based on your risk tolerance or are you choosing investments based on their recent return?  How did you feel in March when the markets were crashing?  Nobody is comfortable watching their portfolio value decrease.  How you react is important to understanding your risk tolerance.  If you were able to stay the course knowing that you had time for your portfolio to recover than you were likely invested within your risk comfort zone.  If you were losing sleep at night or you sold investments on the way down than likely you were invested more aggressively than your ability to ride out the ups and downs of the market.    

Now is a good time to review your reactions to the recent market downturn and subsequent recovery.  We tend to give more weight to recent situations, typically this can work against us in investing, particularly during long periods of positive market returns.  Now is a great time to use it to our advantage and ask ourselves honestly how we felt and look at what actions were took.  

Step #3 Review your convictions

Do you believe there are opportunities within certain sectors or certain themes that will provide more potential?  Or do you believe investing in broad-based funds that track market indices is the best approach?

The media has been filled with articles about the "New Economy" and how tech stocks will be the leaders of this new economy.  New Exchanged Traded Funds (ETFs) are popping up quickly to capitalize on this theme.  These may be perfectly valid investments to hold in your portfolio, but have you done the research to determine how a move to increased work-from-home or telecommuting employees may impact the technology industry?  Is this a more permanent change in how we work or is it only temporary due to social distancing? What fundamental research have you done to validate your belief that a new economy is here to stay? If haven't done the research and you don't have a strong conviction that this is more than a short-term trend, they you may be setting yourself up for the no-win situation of hopping from one fad to the next.

If you believe in investing in funds that track the overall market and not one specific sector or theme then don't let any hype around a sector or theme, such as the "New Economy", distract you.  Stick with your conviction .

During times like the current market conditions we are faced with today when it seems like the stock market is disconnected from the economic situation it is even more important to make sure you have a solid investment strategy based on your overall financial situation and goals.   

Are you concerned you may not be invested appropriately for your investment philosophy?  Click on the risk assessment link below and we can schedule time to review your current portfolio.

Does My Portfolio Fit Me?

Just want to talk? Give me a call

Other blog posts of interest

Are You Investments Keeping You Up at Night

Keep Calm and Carry On: What to Do When Markets Go Down

  5. https://www.lexico.com/en/definition/stock_market
  7. https://www.econlib.org/library/Columns/y2010/Murphystockmarket.html
  13. https://www.bea.gov/data/gdp/gross-domestic-product
  15. https://www.bls.gov/news.release/pdf/empsit.pdf
  17. https://www.nber.org/papers/w24085.pdf
