Headline: The Market is up, and I just feel down?

Date: 11/13/2020

Body: Every day, it seems, I hear 2 things:

  1.  A friend has lost their job.
  2. Stock markets rallied and hit a new all-time high.

At first sniff, these two statements don’t appear to be in the same article.    Often, when I speak with somebody about this seeming dichotomy, they shrug and offer age-old advice along the lines of “The stock market is NOT the economy, stupid.”  Perhaps I should work on getting more supportive friends.

My relationship issues aside, I cannot let the subject slide, as it seems so antithetical to common sense.   If my neighbors and friends are so often being laid off (furloughed seems to me like a polite fiction) how does the stock market get pushed to new heights?   The latest jobs numbers indicate that non-farm payrolls have dropped about 15%, and yet, the stock market has rallied more than 30% from March 2020 lows?  My antennae were a-twitching.

So, I reached out to the Internet and read some articles written by some people who are far smarter than I am, and I am left with one impression; In this very strange time, the relationship between the stock market and the larger economy is even more mixed up than usual.  

Size Matters

Sorry, I don’t want to make anybody uncomfortable, but in this economy (and the stock market fits in here too) it appears that bigger can be better.     For many years, we have been told that small businesses are “the engine of the economy.”   And, for the moment, that was true.   But, they were hit by a double-whammy: As their services were in declining demand, many of their employees became personally affected by COVID-19.  Because they are smaller, they can bear only small bumps in their business cycle.    This has been a protracted hiccup, and often, the patient cannot respond.    The boil-out is that they go out of business.   As they are a small business, they have no shares on offer at any stock market, so, their demise goes largely un-noticed by the investing public.   At the other end of the spectrum, we have the mythically-sized tech firms (Often called the FAANG stocks: Facebook, Apple, Amazon, Netflix, Google, arguably Microsoft).   These firms are VERY LARGE and have cash hoards that can get them over the protracted hiccup.   But, being tech companies, they are rewarded in the pandemic economy because they allow us to connect with friends and communicate in ways that would now be deemed unsafe.  So, they started out very large, and are getting rewarded for supporting our needs to be connected with one another.   So, their stock prices have gone up a lot.  This seems obvious in a capitalist society like the U.S.

What was not so obvious to me was how powerfully these few stocks affect the stock market.    I had an object lesson in this when I looked at my brokerage statements.   I had purchased 2 different index mutual funds (one based upon the S&P 500, one based upon the NASDAQ.)   The logic was that both indexes would offer me good diversification because of their different constituents.   But, I looked more closely at the holdings of each index fund.   It turns out that there was slightly more than 20% of overlap in the 2 indexes, and this overlap was because of the before-mentioned FAANG stocks.  In effect, if the stock market is a trailer with a load, each normal stock is like a Toyota Camry or a Ford F-150, each one pulls as hard as it can, but even together, forward momentum is hard-won.   The FAANG stocks are like bus-capable tow trucks, and their effect is far more impressive than any mid-sized sedan  or light truck.

What I am saying here is that it appears that the stock market is being massively bolstered by the pillars of the FAANG stocks.  Factor them out, and perhaps the stock market might show a story, more in concert with what you hear at the coffee shop.   And, please, please, take time to patronize your local coffee shop.


What is FAANG? The 5 big tech stocks and their importance – Business Insider

Investing in FAANG Stocks (thebalance.com)

Is This What’s Behind the Unstoppable FAANG Stock Rally? | The Motley Fool

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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