Weekend Reading: Stock Market Is Not The Economy Edition

Stock markets around the world continue to climb higher after bottoming out on March 23. In what seems like ages ago, markets fell harder and faster than ever before as the world grappled with a global pandemic and stay-at-home orders.

The TSX, as represented by iShares XIU, fell more than 32%, while the S&P 500 (represented by iShares XUS) fell more than 22%. Since then, global markets have steadily recovered and XUS is down just 1.04% on the year while XIU is down a relatively modest 11.5%.


Some people are not happy about this. One article reported that billionaires got $434 billion richer during the pandemic – an absurd claim that ignores the stock market crash leading up to March 23.

Another article claimed that bored day traders were ‘stupidly‘ playing the markets during these uncertain times and are going to ‘get played’ because economic conditions are only going to get worse. That may be true, and I recently wrote about the pitfalls of commission-free trading, but let’s dig into the reasons why this article makes no sense:

1.) The stock market is not the economy. Yes, it may seem strange to see markets rising at a time when economic and employment data is incredibly depressing. But the stock market is forward looking and based on expectations.

Collectively, investors know how bad things are. That’s why markets fell so hard and so fast in March. But it also has some baked-in expectations of both the present and the future. As long as those expectations are met (as bad as they are) there’s no reason to think markets can’t continue to trend higher.

Besides, look at the strength of the five largest companies in the U.S. (Microsoft, Apple, Amazon, Alphabet and Facebook), which continue to thrive and now account for one-fifth of the market value of the index. 

However you look at it, historically the linkage between the stock market and the economy is actually pretty weak.

2.) The future is always uncertain. Cynics argue that we shouldn’t invest in these ‘uncertain times’, as if there’s ever a time when the present and future are certain and predictable.

Investing has always been about believing in the power of human ingenuity and progress over time. So even though the cause of this crisis is different than the 2008 financial crisis, or the 1929 great depression, we’ve always found a way to persevere and reach new heights. 

If you truly believe this time is different then we have bigger problems to worry about than where to invest our money.

No one knows which way markets will go in the short term. But with history as our guide we know the long term trajectory points up and so it’s best to stay invested.

3.) Young traders with $1,000 accounts aren’t moving the market. Yes, many young investors are going to lose money betting on stocks in their new commission-free brokerage accounts. But young investors have always done this, from the dot com era through the financial crisis. Call it a rite of passage for some investors who believe they can strike it rich investing in the latest fad, from tech stocks, to cryptocurrency, to cannabis stocks, and now (apparently) pharmaceuticals.

Betting on individual stocks is not a smart strategy, period. But it’s not any more stupid today than it was 10 or 20 years ago. In some cases the best thing to happen to these young traders is a quick loss and a lesson learned. A worse outcome might be a series of winning bets, which will lead to overconfidence and misjudging their decision to be good thanks to a favourable result.

This Week’s Recap:

I was please to once again collaborate with a panel of experts to select the top ETFs in 2020 for MoneySense. The list expanded to 42 ETFs (out of 800), but include a lot of overlap such as the asset allocation funds offered by Vanguard, iShares, and BMO.

I managed one post this week, with a list of five investing rules to follow in good time and bad. I’m kicking myself for not including a sixth rule: simplify.

I’ve answered countless reader questions in the last few months about asset allocation, asset location, tax efficiency, U.S.-listed ETFs, Norbert’s Gambit, and comparing similar ETFs across different providers. Most of that stuff doesn’t matter, or at the very least will only improve things at the margins. 

To be clear, if you’ve decided on a passive indexing approach then you’re already 90% of the way there. Investors can drive themselves crazy tripping over every decision to fine-tune and optimize their portfolios.

Try this approach instead. Decide between paying slightly more for a hands-off, automatic investing solution (robo advisor), or a lower cost DIY solution (asset allocation ETF through a discount brokerage account).

I’ve seen way too many investors end up with decision fatigue, analysis paralysis, and complexity regret by trying to build and manage their own portfolio of multiple ETFs in each account.

Keep it simple and opt for a fixed asset allocation across all accounts. You can do that easily today by purchasing an asset allocation ETF like VBAL or VGRO in each of your RRSP, TFSA, Individual account, etc. No need to get any more complicated than that.

Weekend Reading:

I mentioned recently how I’ve shifted our credit card rewards strategy to focus more on cash back and free groceries. On that subject, here’s a great look at how to maximize your PC Optimum Rewards.

Wondering when Canadians can start travelling again? CBC’s Sophia Harris shares everything you need to know about travel and travel insurance.

Millionaire Teacher Andrew Hallam has been absolutely killing it lately with his writing. I loved this piece about Netflix and Amazon investors going crazy:

Five burley men stormed my home. They dragged me by the hair to my laptop (I often dream about having hair). The biggest guy’s name was Jeff. He screamed, “Log in to your brokerage account! Sell everything! Then invest the entire proceeds into Netflix and Amazon shares! And if you try to sell them before ten years are up, we’ll come back for your scalp!”

Real estate pricing forecasts are all over the map, with experts predicting everything from a rise of 12% to a drop of 30%.

Half Banked blogger Des Odjick says voting with your dollars has never mattered more. I agree 100%. Like Des, we’re also supporting our favourite local businesses and have even created a nice Friday night tradition of take-out and a virtual wine-tasting while our kids watch a movie.

Behavioural economist Richard Thaler says the law of supply and demand should have eliminated any shortages at the grocery store but it failed to account for one thing: it’s not fair to raise prices in an emergency.

Of Dollars and Data blogger Nick Magiulli explains why failed predictions don’t matter

The Ritholtz Wealth Management team share their 10 rules for retirement investing:

Do you and your spouse build in some ‘no questions asked’ spending money in your budget? We do. This Pocket Worthy blogger explains how a $500 monthly allowance saved her marriage.

My Own Advisor Mark Seed shares a detailed look into his quest for financial freedom. Well done, Mark!

The Globe and Mail’s Tim Cestnick shares some questions every cottage owner needs to answer.

Here’s an incredible and heartbreaking story from Morgan Housel on the three sides of risk.

Finally, an inside look into King Arthur Flour, the company supplying America’s sudden baking obsession.

Have a great weekend, everyone!

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1 Comment

  1. Betty Therriault on May 23, 2020 at 2:42 pm

    I have just read in the G&M today that both WorkSafe B.C. and ICBC have lost Billions in the stock market this year . Am I right -that means all of us who pay into these two agencies have also suffered this loss?
    Next Question – Who was the Benefactor?

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