Those in the finance world hear this all the time, and the COVID -19 pandemic may be one of the best examples of this statement in action.
Although stay at home orders and the close of businesses across the globe have been very helpful to combat COVID -19, there is no doubt that it continues to be detrimental for small businesses. As an indicator, 55% of small businesses closed on Yelp have shut down permanently during the coronavirus pandemic. If these businesses haven’t closed for good, they have been required to reduce their hours, their capacity, and/or minimize their offerings and their ability to acquire loans to manage through this difficult time. This is not something that we necessarily see reflected in the stock market. In fact, markets have recently surpassed the highs set before the pandemic hit.
Over the past few months, many of our clients have been puzzled by the rising stock market, considering that amidst the pandemic, GDP dropped 5% in the first quarter and 31% in the second (year over year). Individuals filing for unemployment reached a high of 14.7% at the end of April2. That is higher than the peak of 10% in 2009. You have to go all the way back to 1940 to get a number that high. Despite this, stocks have surged and continue to trend upward since initially entering a bear market on March 11th. Why is this?
Companies represented in the stock market are large businesses, they are not the family-owned restaurants, salons, cafes, gyms, etc. Small businesses have struggled to receive loans after the first wave of emergency lending. Comparatively, large businesses have significant cash reserves and the ability to issue large quantities of debt at very low-interest rates or even issue stock to raise cash to get them through this tough time. Small businesses do not have that luxury. Massive businesses such as Amazon have actually been profiting more due to the pandemic since people have been forced to shop online versus in person. Other large technology companies like Apple, Microsoft, Google, Facebook, and Netflix have also seen minimal disruption in their businesses. These companies make up a significant portion of the stock market to help explain the disparity.
When we think of the country’s financial health, we tend to lump a variety of metrics together – GDP, debt levels, unemployment levels, the stock market performance, savings rates, etc. It is important to recognize, however, that although they have a lot to say about the current state of a country, they don’t tell the same story at the same time.
With the elections around the corner and uncertainty of the pandemic, the market can be extremely unpredictable and volatile. If you would like to receive BakerAvenue’s market updates, watch upcoming webinars, or get insights on our economy, contact us.