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Why is the stock market doing well when the economy is so bad?
Job losses, bailouts, empty high streets and more lockdowns – they all paint a scary picture of what is happening out there. We are bombarded with these images every day from our wonderful media.

It’s clear that the real economy is taking time to get back up to speed – not just here but globally. So how come the market has had such a miraculous bounce? Well, hopefully what I’ll show you below is that the bounce is not miraculous, and in a lot of ways it has been justified.

Remember rule no.1 of stock markets. The stock market ≠ the economy and, the economy ≠ the stock market.

The stock market is an estimating system that calculates what the economy “should” look like in anywhere from 6-18 months time. Right now the markets are guessing that the economy comes back to some sort of normal and hence has bounced back from the desperate lows we saw in March.
Plus, not all markets are the same.
I present the difference between the Tech-heavy Nasdaq in the US and our old favourite FTSE 100 (full of banks and oil companies who pretend not to be oil companies).
So instead of the stock market being seen as one big entity, there are many different parts. To understand this lack of performance in the traditional economy sectors such as Banks, Retail, Travel and Energy companies is not difficult. These sectors are struggling with lack of demand and their respective share prices have under-performed as expected. So all as it should be here.

On the flip-side what we’ve seen over the last 6 months is an enormous leap (estimated of around 5 years) in our use of technology. Working and shopping from home, moving networks to the cloud, the importance of data storage and security and online communication have all enormously increased their presence and importance within ordinary people’s lives.
On a personal note, having parents in Australia, I’ve always used Skype a lot. However what is bizarre now is that I’m having the same video calls as my brothers with my parents – and they live 15 minutes away from them! I think we all have personal anecdotes on how we’ve survived lockdown with the use of technology and it’s hard to see us going back to how it was before this.

This is what is causing the rise in technology stocks.

Now the other factor at play here is the importance of Technology stocks to the overall market. Once a small sector, Technology is now the largest stand-alone sector is the S&P500 – the main US stock market index – and by a long way. See below.

And now compare this to our old favourite FTSE 100

Yes, just 1% in technology. Pathetic isn’t it.

But back to the US, which is important because being the largest market in the world it makes up a large weighting in the passive funds most clients of mine own. When you have the largest sector weighting of a market performing very well, it makes it hard for the index to fall.
So, in summary, are markets fairly valued? To be honest – Yes. I think the rise in technology is totally justified by the increased importance it plays in our lives.

Does that mean it will continue to go up? Of course not. Markets will be markets and will bounce around all over the place in the short-term. However the long-term impact of this technology adoption cannot be underestimated.

All the best,
Adam


##The above is not personalised financial advice and just market commentary. Investments can go down as well as up##