The market for the month of April is up about 2,400 points. That gain is about 11%. It is the best one month gain for the market in many years. While the gain is very welcome due to its partial restoration of our account balances, it may appear to some people to not make sense considering the current economic times.
The topic of today’s newsletter will be the stock market. Why does it go up and down? Why did it go up when the economy is currently declining? In short, the reason is that the stock market is a prediction of the state of the economy in the future. The stock market price is not about the current economy. It is about expectations of the future economy. In a month/year/decade etc. what will the economy be like then? If people think the future will be bright, then they will buy more stock now (so they can profit from that future) and that buying will drive the price up. If people think the future will be dire, then people will sell more stock (to avoid being hurt by a market crash) and that selling will drive the price down. The people who bought stock in the last month believe that the pandemic will be over reasonably soon and when it does the economy will roar back. Those people think they would thus make a lot of money from buying at a bargain low price and selling in the future at a high price.
People’s memories tend to be very short. They place more mental weight on recent experiences than older experiences. Current bad news is more important than past good news and current good news is more important than past bad news. It is that overreaction to current news events that causes wild swings in market prices and provides some people the opportunity to profit if they have the ability to go against the crowd. Some of the biggest fortunes in history have been made by buying in times of crisis, when everyone is running screaming to the door. We have both made purchases during this crisis of stocks that we believe have been excessively beaten down by COVID 19 and will recover strongly when the economy does. We know that the stock market will recover, but it might recover sooner than the economy does.
If you have any questions for us, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Daniel and Eli
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Questions for the comments
Did my newsletter make sense? Do you agree or disagree with what I said?