Unemployment just hit 14.7% yet the market is way up. Please explain!
You might be wondering why the stock market is doing so well when you're doing so badly.
Even if you're coasting, you likely know people who are struggling.
The reality is, small-town America doesn't go under the lens of Wall Street, says Walid Petiri, owner of Financial Management Strategies, an advisory firm in Baltimore.
Certain geographic areas, including the Northeast, California, Seattle and Texas, help drive market movement, Petiri says. Then, industries such as financial services, oil and tech also impact the market.
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"When Wall Street looks at this, it asks, how are those big conglomerates and companies doing?" said Petiri.
Four companies with great digital presence — Microsoft, Apple, Google and Amazon — continue to grow and are 20% of the Nasdaq — and that's what helping push up the market.
You can see how things might go by looking at the futures market numbers before the stock market opens each day.
Does the market have a crystal ball?
But that's kind of how the futures market seems.
What it really is: "A market that's open continually that allows investors to speculate in advance where they think the market will be," said Petiri.
Originally it was a way for agricultural business to anticipate crop yields and then determine prices for the buying and selling of commodities.
The futures market shows you what people expect the Dow Jones or the S&P 500 to be, Petiri says. It's a way of predicting trends, "a marketplace that allows people to put an expected price on commodities and assets in the future."
Someone did something
The futures market can also be a tip-off about real-time prices.
Sometimes, by the time the markets open in the morning, there may have been news that the Federal Reserve or Congress or a corporation such as Microsoft, Google or GM did something. Perhaps they're coming out with significant earnings, Petiri says. "That would mean the later round of futures contract markets changed," he said.
Let's say you're buying stock. At 10 o'clock one morning, you're willing to pay $50 per share for some stock. Twenty minutes later, perhaps you're willing to pay $60 or $40 — depending on news.
"The information flow affects the prices people are willing to pay," Petiri said.
Could be worse!
With a 14.7% unemployment rate, why was the futures market up 275 points?
Short answer: The number is 14.7% and not 17.4%. "The market expected it to be worse," Petiri says. "People were expecting a number at 16 or 17."
That would be much worse than 14.7%, so Wall Street is basically saying, "Things are bad but not as bad as they could be, and it's going to get better."
"The cause of optimism is, I believe, a lot of oversimplification," said Cristian Tiu, a finance professor at the University of Buffalo.
Many investors believe the economy will reopen and a cure for the coronavirus is around the corner, he said.
And he blamed history for that rosy outlook.
"What followed the Spanish flu was the Roaring Twenties — so if we are to think with that precedent in mind, then we are expecting things will go well," Tiu said.
What to do now
Petiri suggests four strategies: Ask yourself what you can do to generate income and burnish your skillset. Ditch aspirational debt. Try something new, whether swapping an old, expensive habit or considering new employment.
Last, be aware of the network effect that rich people use all the time. "No one gets anywhere without paying it forward and paying it back," he said. Reach out to friends and families, and strengthen connections.
When it comes to your money in the stock market, the conventional wisdom still holds. Don't let panic or fear drive your decisions. "What's your comfort level with risk, with loss?" Petiri said. "Step back and be thoughtful about what you're trying to achieve."
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.