It’s the Economy Silly

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Well in Bill Clinton’s 1992 campaign he said, ‘it’s the economy stupid’.

While playing golf I tend to get asked the following question often, ‘what do you think the share market will do this year?’ Lately, I am getting the following, ‘if the economy is doing so poorly, people are losing their jobs and businesses are going broke, how can the share market be doing so well?’

The share market is performing extremely strongly leading people to believe that the share market has decoupled from reality.

The economy many people experience, while bleak, is local, personal and, for the most part, either not publicly traded or plays only a small part in the share market moves. We notice closed shops and cafes, deserted airports, and empty hotels. The most visible and economically vulnerable industries are among the smallest, based on their market-capitalisation weight in major indexes. Let’s take a couple of well-known Australian companies. Qantas Airways is a household name, but if they went broke tomorrow, the effect on the All Ordinaires (top 500 Australian Companies) would only be a reduction of 0.35%. HelloWorld Travel 0.02%. Myer Holdings 0.01%. In fact, if all of the companies from 400–500 listed shares broke tomorrow, it would hardly make a dent in the overall market capitalisation. Contrast that with the top 20 shares on the market, which make up 50% of the total market capitalisation, and those 20 shares are doing quite well in this environment.

In the US Market, out of the S&P 500 largest companies, 470 are trading in negative territory, and yet the market is surging. Why? The FAANG’s are out! Facebook, Amazon, Apple, Netflix & Google are doing a roaring trade with over 50% of their revenue generated overseas. If your only frame of reference is a domestic economy, this is easy to miss. So, the economy is not the stock market and vice versa.

Stephen Lowry (CFP® Professional, DFP, AIF®) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

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