The Disconnect from the Real World and Stock Markets

July was a good and bad month. For stocks, it was good. For the real world, it was bad. 

It might seem odd that stocks do well when the real-world economy looks ugly. The divergence is more common than you might think. 

Both the stock and bond markets rebounded during a slew of bad news. All things considered, the stock and bond markets should’ve gone down in July.

Inflation: All inflation readings are higher, suggesting that we haven’t quite reached the top of inflation yet. 

Interest Rates: The Fed raised rates another 0.75% to tame said inflation. It is increasingly more expensive to access loans and credit. 

Earnings: Companies are reporting decent earnings but are still citing high inflation and slowing consumer spending. 

Jobs: The tech industry is doing a mix of layoffs, job rescinds, and slowing hiring. Other industries are sure to follow as the economy slows. 

Recession: GDP shrank for two quarters in a row, making it a recession in the loosest sense. 

Talking Heads: A cottage industry forms when perpetual predictions end up being right. We’re seeing more talking heads trying to make a name for themselves by forecasting doom and gloom. 

Remember when there were calls for a double dip in the markets after the 2020 bottom in March? They were wrong.

The predictions made sense in the moment, the lockdowns across the globe were in full effect and economic activity was ground to a halt. Things were seemingly going to be worse. 

But stimulus payments combined with an ultra-accommodative Fed fueled markets during lockdowns. Pandemic darlings experienced insatiable demand. Zoom, Peleton, Netflix, and DocuSign were unstoppable. Easy money and credit pushed unprofitable and disruptive tech to new heights. 

There were plenty of investors waiting to buy the second dip in 2020, only to find a mini dip in September, when the market was already higher than the previous pre-pandemic high. Most of the returns that year were already locked in by August, essentially leaving scraps for “buy the dippers”. 

The fear of missing out (FOMO) kept the party going as buyers kept piling in. 

We’ve seen a disconnect between the stock market and real life before, and we’ll see future disconnects like this. It doesn’t mean the market got it wrong or right. Get comfortable with the fact that the movements are random and unpredictable in the short term. 

If the July 2022 rally is for real, investors waiting for better news missed a big return month. The markets are forward-looking, and might already be looking ahead to a post-inflation world. FOMO may also kick in as money on the sidelines starts getting invested again.

If this rally is a head fake, the worst thing I’m preparing for is the talking heads saying, “I told you so”. That’s about it. 

If there is another leg down, then it creates a buying opportunity. The name of the game is to buy low and sell high. We’re going to always see bad news because that’s what sells ads for the media. Long-term investors see that as an opportunity to buy low. 

Unfortunately, we don’t have the ability to invest in the past. All you can do is focus on the present for a better future. The hardest part about all this is ignoring the noise and staying invested. 

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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

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