Do the Markets Care?
By Matt Salm, Investment Analyst
As the last several months have clearly demonstrated, headlines have the power to move the stock market.. News of a potential vaccine or remarks made by government officials can fill investors’ hearts with optimism or pessimism, and markets move accordingly.
Trending news frequently has less influence. The social unrest that has gripped much of America in recent weeks is a stark example. Regardless of their views on political and social issues, almost everyone agrees that the nation’s response to racial injustice is important. But does the stock market care?
Based on the last couple of weeks, the answer is… not so much.
A recent article on Fortune.com points out, “[t]he stock market has a long history of ignoring social upheaval.” There’s no shortage of historical examples that drive home this point. Tom Lee, head of research at Fundstrat Global Advisors, notes that “1968 was the year that ‘shattered America’ and many tumultuous events and violence took place… And despite that, the equity markets managed to perform solidly.”
Does the stock markets apparent ambivalence to social causes mean investors are a cold-hearted lot? Not really. Rather, the stock market is a mechanism for valuing what a publicly traded business is worth. As such, it is focused on economic and business conditions that in many cases have a much greater influence on future returns than societal struggles.
The financial markets tend respond with jitters to headlines about disease spread, rising tensions with China, or a North Korean missile test. But in many instances, issues that are important to society simply aren’t reflected – for better or for worse – in the stock market’s performance. Only when societal developments threaten the economy or corporate profits is the stock market is sure to sit up and take notice. Is this a bad thing? That depends on your views of the role the stock market should play in our society.