Why is the Stock Market Hitting Highs When the Economy is Hurting?
The U.S. stock market (S&P 500) has continued to reach new heights in 2021. At the same time, millions of Americans are struggling to hold on to their small businesses, meet basic needs and find jobs. I am often asked why the stock market is surging while the economy is in bad shape. This article will provide an analysis to help answer that question.
How company size and industry play a role in the impact of the COVID-19 pandemic
When evaluating the economy today, everything starts with the COVID-19 virus. The virus hit some industries, such as the hospitality, retail and other high-touch sectors, harder than others. Companies in these sectors had to shut down their stores, restaurants and salons for a period of time and are still struggling to perform their services in our new social distancing era. (You can’t get a haircut virtually!)
In contrast, large companies and industries that have been able to use technology to adapt to social distancing have not suffered as much. Many of the workers at these companies have maintained their income and are purchasing items from Amazon, subscribing to Netflix and buying Apple iPhones, fueling billions of dollars in revenue for those companies and causing their stock prices to surge.
While small local retailers have closed their doors and are struggling to stay in business, some large companies and retailers have profited from consumer purchases during the pandemic. For example, the stock price of Target has increased more than 100% over the last 11 months. Target had the capital and technology to quickly adapt to the social distancing era – unlike small, local retailers – and their posted earnings exceeded Wall Street expectations. While they are part of the same industry, smaller retailers’ recovery looks much different from large retailers like Target due to having much different access to the capital and technology needed to quickly adapt.
How revenues from abroad are further fueling the stock market
Another influence contributing to the climbing stock market is rising income from abroad. Companies based in the United States are getting more of their revenues from customers outside of the United States. In 2020, the companies that make up the S&P 500 got 40% of their revenues from customers outside the United States, a sharp increase from 30% in 2010. In the 1990s, revenues from foreign operations were negligible. Although international travel is limited right now, you may recall in previous travels seeing familiar chains like McDonalds or Starbucks in foreign countries, and you may have even had the chance to buy American products abroad, like an ice-cold Coca-Cola.
The trend of U.S based companies getting more of their revenue from outside the U.S. is likely to continue as emerging markets like India look to U.S. companies to provide goods and services. Those companies that expand their revenue streams across the globe will likely be rewarded with increasing share prices. Moving forward, this means that share prices of U.S.-based companies will not be as dependent on the U.S. economy like they have been in previous years. It is still imperative that the economy in the U.S. experiences a strong economic rebound if the stock market is to rise in 2021.
What we can expect going forward
It is plain to see that a strong rebound in our economy will be directly linked to how well we vaccinate our population. This will allow people to go back to some semblance of the way things were before COVID-19 and provide job opportunities to the millions of Americans who want to work to provide for their families. It will also enable small and local companies, especially those who can’t provide their services virtually, to get back on their feet.
As a financial advisor, I will be looking at investing in companies for my clients that take advantage of the digital age, harness new technologies to change our lives for the better, and increase their revenue streams. As a member of my community, I am hopeful that a successful vaccination campaign will bring back local hospitality and small businesses so the people who have suffered so much can start working again.
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Jason Egge is a Financial Advisor with Securities America, Advisors, Inc. Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Bankers Trust, BTC Financial Services, a division of Bankers Trust, and Securities America are separate companies. Securities America and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.
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