Many people are baffled by the recent strength of the stock market given Covid-19 and the damage done to the economy.  How could the stock market be so strong while so many are suffering?  Shouldn’t the financial markets reflect the real economy?

One need only look at some of the reasons I’ve given behind the equity rally to see that there is a disconnect between the markets and the economy.  The ultra-low interest rates and government stimulus (i.e. liquidity) wouldn’t be needed if the economy were strong.  If GDP were growing at 5 percent or more annually, then TINA (There Is No Alternative) wouldn’t exist. 

I’ve been appropriately optimistic and upbeat in this column because I’m writing about the financial markets. Still, I’m well aware that some 13+ million people are unemployed and that ignores part-time workers and those that have stopped their job search. The pandemic is stressful and too many have lost loved ones.

But this is a stock market column and the financial markets need not reflect the real economy. The stock market is about momentum (are things getting better or worse?) while the economy is about absolute numbers. Yes, 13 million people are receiving unemployment benefits, but it was 29 million in mid-August. The real economy shows extremely high unemployment, but Wall Street sees that things are rebounding.

There is even more that separates the real economy from the financial markets.  Many small retail businesses are closing as a result of Covid, but Amazon, Costco, Target and Walmart are thriving. That may be bad for society, but it’s good for the stock market because these four companies are publicly traded.

Along the same lines, many small restaurants are closing, but people are still consuming 2300 calories a day.  Losing mom-and-pop restaurants is bad for society but good for the stock of Chipotle Mexican Grill, which is up 63 percent this year.

The unfortunate legacy of Covid-19 will be that the difference between the haves and the have nots will widen.  The haves are richer, which is why real estate prices are soaring and retail sales are at an all-time high.  Large businesses are getting larger while many small businesses are struggling or closing their doors. 

I’ll continue to write this column from a stock market viewpoint. My job is to build portfolios appropriate for whatever the circumstance. Democrat or Republican, worsening virus or not, I want to be properly positioned. That’s also what this column is about.  I want to see what others don’t.