For many people, 2020 has been the worst year ever. Yet the stock market’s doing well, and that has a lot of investors confused. Why the disconnect?
There’s a lot that goes into stock market behavior. In general, though, there are a few things that give the market its positive trend — and reasons why stocks can keep rising even when bad news seems to be everywhere.
How the market fared on Thursday
The stock market’s optimism came through again on Thursday. Early on, it looked like there’d be another losing day for the major market benchmarks. Yet by the end of the day, the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) were all up, with the Nasdaq leading the way higher.
As COVID-19 cases are on the rise and the threat of political instability seems to rise every day, days like today seem incomprehensible to many people. Yet smart investors don’t let emotions rule their decisions, whether it’s buying into a rally for fear of missing out or staying out of the market just because things look dire. There are actually some good reasons why markets are able to rise in tough situations.
1. We’ve gotten out of jams before
Investors learn from experience, and one of the most painful experiences anyone can go through is missing out on a big market rally because conditions didn’t look all that good. Think back to these events:
- After the 1987 stock market crash, many questioned whether the U.S. economy would return to the bad conditions of the 1970s. Instead, things got better quickly, and stocks quickly bounced back.
- The bear market of 2000 to 2002 combined the bursting of the tech bubble with the 9/11 attacks. Yet although similar national security threats still persist today, markets rebounded from their worst levels and posted solid gains.
- Many believed that the financial crisis in 2008 and 2009 would cause the banking system to collapse. Thanks to the efforts of policymakers, legislators, and average Americans, what followed was a 10-year bull market and some of the best performance the stock market has ever seen.
There are only so many times you can see things like this happen before you’re convinced of the long-term trajectory of the stock market. When that happens, any difficult situation becomes a buying opportunity.
2. Innovative companies find ways to overcome adversity
The early part of 2020 provides a great example of how stocks can deal with the unexpected. Nobody foresaw a global pandemic, but many companies were able to take their products and use them in new ways to help people cope. That sent their stocks sharply higher, offsetting losses in shares of other companies.
Some companies are more stable than others, but every business has to be aware of potential disruption. The fact that so many succeed is a testament to the resiliency of the stock market — and that’s another reason to feel confident with your investing.
3. We have a vested societal interest in the stock market
This last point is a bit esoteric, but it essentially boils down to this: The financial well-being of millions of Americans relies on the stock market as an institution. Therefore, societal institutions fight back when the stock market faces a systemic threat.
We saw that during the financial crisis. Many people were appalled at the lengths to which various leaders went to provide support to the stock market at a critical moment, arguing that financial institutions should have been allowed to fail. Regardless of whether you agree or disagree, the fact is that Wall Street got that support. That underpinning of support reduces the risk of investing and makes stocks more attractive.
Be pragmatic in your optimism
As a natural pessimist, I understand how hard it can be to see what’s happening in the world and think that it’s a good time to invest in stocks. But I’m also a pragmatist. When history proves market pessimists wrong time after time, it only makes sense to adopt a more positive view. Regardless of whether you do, you can count on others doing so — and profiting from their decision.
