Explaining the Disconnect Between Stocks and the Economy

Posted by Dana Funds Investment Team on May 27, 2020 4:34:57 PM

In recent conversations with clients, we are getting fewer questions about our economic outlook. Many of our clients are themselves business owners and have already felt the pandemic’s economic pinch firsthand. They don’t need investors to explain the fear gripping Main Street. What puzzles them is how the stock market could be so at odds with the economic gloom.

While entire industries are on the sideline during the pandemic and the unemployment rate continues to climb, stocks have recovered much (though not all) of March’s losses. So, what’s behind the rally that seems so out of sync? In short, we think the market is confident about the safety net the Fed and the government has provided. Given the size and scope of that safety net, markets are already looking ahead to when the quarantine ends.

The Fed Deserves Some Credit

We credit the Federal Reserve and the federal government for learning from previous crises, and realizing they needed to act in creative ways to avoid a Great Depression-like scenario. To call recent Fed actions unconventional is an understatement. Among other measures, the central bank is lending to small businesses, buying high yield ETFs to keep credit spreads and lending rates reasonable, and lending directly to state and local governments through a Municipal Liquidity Facility.

We were also impressed by the federal government’s ability to set aside partisan animosity and pass a $2 trillion economic relief plan, which included stimulus payments and expanded unemployment coverage.

The bottom line is that the Federal Reserve and federal government have put a sizeable safety net under the economy. Markets are forward looking and tend to rebound before the economy. With both the central bank and government appearing willing to do whatever it takes to avoid a longer-term catastrophe; markets are now looking toward economic improvement as social restrictions ease.

Markets Could Stay Volatile

While Wall Street’s rally seems reasonable given the scope of monetary and fiscal support, that doesn’t mean there won’t be more volatility. Consumers and businesses could need more stimulus, and if the second wave of coronavirus spreads quicker than expected, a return to more restrictive measures could certainly weigh on markets.

At Dana, we are not calling the bottom or a further rebound. As part of our investment process, we stay fully invested throughout the cycle because we don’t believe any investor can consistently time markets. But the seeming disconnect between markets and the economy deserves context, and we felt it was worth sharing.

 

Would you like to learn more about the Dana Large Cap Equity, Small Cap Equity or Epiphany ESG Equity mutual funds?  It would be our pleasure to set up a call between you and a portfolio manager on our equity team. Click below and we will be in touch to schedule a call.  

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The Dana Funds are distributed by Ultimus Fund Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC. and the firms referenced in this blog post. 

The Adviser’s judgements about the attractiveness, value and potential appreciation of a particular asset class or individual security may prove to be incorrect and there is no guarantee the Adviser’s judgment will produce the desired result.  The funds may lose money due to fluctuations within the stock market which may be unrelated to individual issuers and could not have been predicted.  The price of the securities which the funds hold may change unpredictably due to local, regional, international, or global events.  In the case of a general market downturn, multiple asset classes, or the entire market, may be negatively affected for an extended and unknown amount of time.