There are many headlines focused on the economy and its chaotic ways, especially during a pandemic. You may have experienced some confusion in hearing that the stock market is reaching record heights while unemployment is still worryingly high. What does that mean for you in terms of investing for retirement?
What Stock Market Performance Indicates, and What It Does Not: It may be helpful to begin with a reminder that the stock market’s performance is an indicator of future confidence in companies. Stocks tend to increase in value as investors believe a company has a good future.
The stock market is an indicator of a company’s expected future health, not the well-being of any individuals connected with it. For instance, it may make good business sense to reduce labor costs by eliminating some positions. While that is certainly negative news for each individual laid off by the company, it may signal a healthier future for the company. A company that reduces its labor costs may also deliver a better profit over the coming months.
Small Businesses Are Not Included in Stock Market News: Much of the unemployment stems from struggling small businesses, such as those in the restaurant and retail industries, who employ approximately half of American workers. These businesses are typically not reflected in the market news.
Three Key Reasons the Stock Market Is Performing Well
Money, like most things in life, is a part of a connected and multi-faceted web. This interconnectedness is visible in these three reasons the market may continue to perform well even in unemployment spikes:
- The Federal Reserve is keeping interest rates low. A brief refresher: When a business needs to borrow money, they borrow it from banks. In turn, those banks borrow from the Federal Reserve, which is working to keep interest rates low in order to keep businesses thriving through the crisis. Obviously, a business that is able to borrow money at a 3% interest rate will have an easier time than one forced to borrow at 10% interest.
- The future is looking better and better. Several companies have vaccines in development, and trials show a high rate of efficacy, encouraging investors that all industries will be in motion again within months.
- Some companies have done well, even during the pandemic. From tech to research, there are certain industries that have been able to pivot during the crisis and keep their earnings steady, if not increasing. They are serving to buoy some of the more difficult segments of the market.
The pandemic is not yet over, but those investing for retirement should feel increasingly confident as they stay the course. To learn more, contact us to schedule an appointment with an advisor at Lawson Kroeker.