Stock Market: Don`t Be Surprised By The New All-Time High

 

(Drivebycuriosity) - Corona-19 pandemic or not, the US stock market, represented by the S&P 500, climbed to a new all-time high. Some might be surprised that the market recovered so fast even though the US economy is still in a deep mess. The skeptics don`t understand that the stock market is always forward looking. The market does not care much about the current situation, it tries to anticipate the economy in the future. all-time highs are normal and part of the nature of stock markets. And in the long run the market always goes up, after every correction, crash & bear market follow new all-time highs. 

Since its inauguration in the year 1896 the Dow Jones, another gauge for the US stock market, has been rising annually at least 7% on average - in spite of all the recessions and crashes that investors have suffered in this period. Considering the interest compound effect an annual 7% gain means that stock prices double every 10 years or so (calculator).

The market is inspired by encouraging news from the Covid-19 front, the development of treatments and vaccines is making progress and in the US the numbers of new reported infections are falling. A new economic boom could be right around the corner. The economic recovery will be fueled by a huge backlog demand. People are tired from sitting quarantined at home, they will be happy to go back to work and they want to visit shops, bars, restaurants again. There are also tailwinds from record low interest rates, cheap oil and trillions of government money. 

All-time highs mirror the long term trend of rising company profits. Companies are getting more efficient & more productive over time - thanks to learning processes and the technological progress. They are learning organisms because they are managed by humans who are continuously improving themselves and their companies. There is a permanent evolution process which is driving the productivity (output per worker) and the winners are getting fitter and more efficient than before.

In the recent years the stock market gains got fueled by the accelerating technological process. We have been experiencing a rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. It seems the Covid Pandemic is boosting these changes. This reminds me of the Spanish Flu from 1918/19 which was followed by the Roaring Twenties and a legion of innovations. 

History shows that consumers and businesses are more willing to change behavior during setbacks (twitter). Innovations typically gain traction during tumultuous times: companies need to get cheaper, faster, more convenient, more productive, more creative. The Covid Pandemic changed many habits. The crisis forces many people to work, learn, shop, educate & entertain from home which is fostering digitization and raising efficiency & productivity of the economy ( driveby ). Online sales worldwide are surging, more people are working from home, they are binge watching Netflix & Amazon Prime, listening via Spotify, reading Kindle books, surfing Facebook & Twitter and businesses are running more & more on cloud computing. Not only consumers are changing, corporations adapt as well. There is an accelerated shift toward digital technologies that are faster, less expensive, more productive and raise creativity.  Post Covid-19 the new normal will be more digitized and more efficient & productive which will be reflected by a strong rise of company earnings. I suppose that the accelerating digitization will spur economic growth in the coming years and fuel further stock market gains.