Economic headlines continue to paint a grim picture of the economy’s current stack, but you wouldn’t know it if you were looking at financial markets.
Thursday morning saw another increase in domestic unemployment, with an additional 3.8 million filings for the week ending April 25, according to the Department of Labor, bringing the six-week total to over 30 million Americans.
Such numbers are paired with similarly poor estimates by the Bureau of Economic Analysis, who indicated the United States’ gross domestic product decreased by 4.8 percent for the first quarter of 2020, the biggest decrease since the 2008 recession.
Yet Wednesday morning saw a 2.2 percent jump for the Dow Jones Industrial Average, and a 2.7 percent increase for the S&P 500, a sharp contrast to the economic reality millions are currently facing.
Why Is the Market Performing Well?
Financial news often views an increase in the stock market as emblematic of a well-performing economy, but this isn’t always the case.
Throughout the ongoing novel coronavirus pandemic, the federal government has made provisions to financial markets to prevent a widespread meltdown.
This has included promises by the Federal Reserve to protect Wall Street and ensure that the value of entire companies does not flame out overnight, including the allocation of an additional $1.5 trillion in short-term loans.
Additionally, the stock market functions primarily based on a projection of future value — brokers and individuals buy stock when they expect their value to increase. And while increases or decreases in stock value are related to the health of the economy, they are not synonymous; just because the economy is poor today doesn’t mean it won’t be better tomorrow.
As such, speculation of economic improvement — like the news that an antiviral drug to treat COVID-19 is in testing — fuel wide increases in stock value across a wide variety of industries, leading to a temporary boost.
Should I Invest Now?
Investing during periods of high market volatility can be incredibly risky, especially if you view rapid fluctuations as a way to get rich quickly.
Instead, maintaining a balanced portfolio, and opting not to sell all your assets at the first sign of smoke, is an often prescribed strategy for long-term gains.
“Most investors put their money systematically into retirement accounts and reap the rewards of volatility without doing anything other than having the money taken from their paychecks,” said financial expert and CentSai columnist Peter Neeves in a previous article.
“If you invest for the right reasons, and in appropriate investments, and you don’t take undue risk, you can capitalize on market volatility to help reach your financial goals,” Neeves added.
You may also consider keeping your money in a money market account, which essentially functions as a savings account but usually requires a higher deposit and nets greater interest. But its historic annualized returns are typically less than returns from a balanced stock portfolio.
Interest returns on these accounts currently hover around 1 percent (with some variation), but their generally low risk can make them a safe haven to accelerate your savings as the economy slowly recovers.
Finally, if you do decide to invest in the stock market, opting for safe choices in the form of index funds or exchange traded funds can offset market volatility while maintaining a solid performance.
If you’re a first-time investor, the latest economic downturn signals the importance of understanding changes in the market. Thankfully, you can stay up to date on the latest news by following CentSai’s COVID-19 page to invest strategically.