This year has been the most confusing time that many investors have experienced during their lifetime, writes Peter Watson.
S&P 500 Index performance in 2020 seems disconnected to the damaging impact COVID-19 has had on the economy.
Early in the year COVID-19 spread around the globe, accelerating change in many areas of the world economy.
Millions lost their jobs. With Forbes reporting many significant organizations went out of business, while others faced financial damage so severe that their survival was questionable.
Add in the health consequences plus the psychological impact on people, and this year has been a disaster. Logic would suggest the stock market would reflect the pain.
Not so.
According to the Economist, the US stock market as measured by the S&P 500 index reached a record high on February 19. In less than five weeks the index fell 33 per cent.
Based on the severity of COVID-19 that significant decline could seem reasonable. Then on March 24 the S&P 500 Index rebounded 17 per cent over a three-day period.
By August 18, the S&P 500 Index had fully recovered previous losses and gone on to set a new high.
Why is there the potential that the stock market will perform better than you might imagine given the chaos the pandemic has created?
The answer is simple. The value of stocks represents the aggregate opinions of millions of investors around the world.
Those investors voluntarily agree to accept a price to purchase or sell a stock at a specific point in time. Consider that capitalistic democracy.
Investors are encouraged to take a long-term perspective and not be overly influenced by short-term events.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.
