The market rally continues. Here's a quick recap: Stocks all across the board soared today. The Dow, S&P, and NASDAQ surged about 2.2, 1.5, and 0.4 percent respectively. Here's a 5-day graph of the Dow Jones Industrial Average- let's break it down and use the information to determine what this means for investors.
(Source: Google Stock Market Graphs.)
The market has been on a steep increase these past 3 days, after consistent good news concerning a possible Covid-19 Vaccine- despite grim unemployment rates and previously bad markets. But the answer isn't that simple. The real answer concerns lagging and leading economic indicators, a simple term many investors are aware of. They're basically what they sound like, but if you're new to the game, here's a summary:
Lagging indicator: "Output", records what happened in the market- does not lead the market.
Leading indicator: "Input", lead and drive the market forward.
The stock market is a leading indicator, while the unemployment rate is a lagging indicator.
For example: the unemployment rate will worsen based on things that already happened- Americans filing as unemployed, companies cutting budgets and laying off employees. The stock market will rise on even the slightest good news of a possible vaccine to the virus.
So how does all this relate to the market rising with grim conditions? Coronavirus cases have passed 100,000 deaths, and more than 1.6 million cases, in the USA alone. On the news that private biotech companies and government-funded scientists or task forces were working hard and making progress, the stock market rose- and it rose a lot.
This rally signals a possible end to the infamous recession and Bear-Market, yet again, it's not that simple. Using this helpful graph comparing the NASDAQ and S&P Percent changes over the course of 3 month (powered by YCharts), you'll notice that the NASDAQ, comprised mainly of technology stocks are leading the market forward, pushing the rally even farther.
Notice that at their lowest, the S&P fell almost 35%. The NASDAQ around 30%, all in late March. Both fell from their 52-week highs. Since then, the NASDAQ has recovered to 5% below it's previous high- the S&P, 12& below. The NASDAQ turned green in its six-month chart. The Dow and S&P both have not. Some of the larger technology stocks pushed the NASDAQ to it's large gain, the most prominent being E-commerce, tech companies with online stores, and fintech (financial technology) companies. Amazon isn't the only E-Commerce store performing high numbers- Shopify entered the game, having sales rise over 25% in just a few short months.
The market looks for a steep recovery after a steep loss, also known as a "V-recovery", because of the V the graph makes after interpreting both the fall and the rise.
Summary: The stocks are being driven by possible good news in a dark situation- leading this rally is the NASDAQ. The markets have had a ongoing rally, even during a grim financial time, because the market is a leading indicator. The unemployment rate, is a lagging indicator, so it reports what has already happened, therefore not leading the market.
(Source: CNBC Market, cnbc.com)
The futures point upwards, and the rally continues, the market looks hopeful to send the Bear back into hibernation, and awake the roaring bull known as the US Economy.
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