On the surface, it would seem as though the stock market should be suffering. COVID-19 has led to high unemployment and reduced consumer spending, which in turn leads to lower GDP (Gross Domestic Product). The situation is even worse than it seems because tens of millions of people are facing eviction and foreclosure, and some people are even struggling to find food. This might lead you to asking yourself how in the world the stock market is performing so well. The secret is that the real economy and the stock market are very different. If you would like to learn more about stock market rally behavior, keep reading.
The five biggest tech companies in the United States are Apple, Amazon, Microsoft, Alphabet, and Facebook. While they drove the entire market higher, keep in mind these represent over 20% of the S&P 500.
- Apple – There are more than a billion Apple devices being used around the world. Since the beginning of the pandemic, usage of these devices has increased. Many people have needed to stay home or run their businesses from home. Whether it’s business or pleasure, more people are using Apple devices. Furthermore, once someone owns an Apple device, they tend to end up happily trapped in the Apple ecosystem, which drives sales.
- Amazon – With more people staying home, online shopping has soared. As the largest online retailer, as well as the largest retailer overall, Amazon sales have skyrocketed.
- Microsoft – With more kids having to stay indoors throughout the year, they have played more video games than ever in the past. This isn’t just about video games though as much as it’s also about Microsoft connecting with young consumers.
- Alphabet Inc. – With increased searches during the pandemic, more searches equal higher ad sales, and it doesn’t hurt that Alphabet is the parent company of Google.
- Facebook – When you can’t connect with friends and family in person, they’re reaching on social media in order to stay in the loop on day-to-day activities and at least keep some sort of normalcy of communication.
Tech has been a big driver for the stock market rally, but it wasn’t the only driver. There has been another major factor.
The Fed & TINA
If the real economy is doing poorly, the Federal Reserve is going to keep interest rates low. When interest rates are low, borrowing money is cheap, which allows companies to grow. This expectation of future success then leads to optimism, which drives stocks higher. The Federal Reserve’s generosity has also led to lower yields on bonds. Currently, if investors are in treasury bonds or corporate bonds, they might lose money on an inflation-adjusted basis. This is ludicrous in a normal world, but we’re not currently living in a normal world. If you want to win, you need to adapt to the situation. With bonds not being attractive, it leads to stocks. And this is where TINA comes into play, which stands for There Is No Alternative.
Stocks are riskier than bonds, but they continue to move higher because of all the money rushing in. This has even led to many new investors diving into the stock market. Younger investors and traders have been buying up stocks like it’s 1999. They spend a lot of time on social media sites and message boards to find the next momentum trade, such as Tesla, DraftKings, or Etsy. These new investors and traders have been enticed by low commissions and promotions, making it easy for them to open brokerage accounts. Then you have those who lost their primary source of income due to the pandemic and moved into the stock market. These investors have also added to the momentum of the market.
An added factor is that many learned the hard way not to fight the Fed after the 2008 financial crisis. Many traders lost fortunes betting against the market at that time. The Federal Reserve kept rates low and the market continued its rally. You can look at this in two ways. One, notice the wording above in that investors and traders have been buying up stocks like it’s 1999. That might give you pause prior to jumping in with two feet. Two, don’t fight the Fed. If you’re confused and don’t know what to do, always remember that you should never try to time the market. It’s about investing in specific companies regardless of what the broader market is doing. And if you’re a trader, you just want volatility and liquidity.