By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
Many investors are perplexed as to why the S&P 500, or stock market, has been climbing to new highs while much of the economy is struggling and unemployment numbers remain high. It’s a complicated answer, but one important reason is that the S&P is not GDP. Gross Domestic Product is the sum of all goods and services produced; it’s the measure of our economy. The S&P 500 is a measure of the stock performance of 500 of the largest US publicly traded companies.
A few key differences include: The S&P is more manufacturing focused, while about 2/3 of GDP is services driven. With mandatory closing of businesses like salons and entertainment venues, continued social distancing and stay at home orders, services have suffered far more than the production of goods. Likewise, since the S&P is stocks of companies, it is investment driven more than consumption driven. We’ve seen sectors like technology stocks benefit significantly from recent forced changes in the workplace and educational facilities. About 40% of profits of S&P 500 companies are derived globally, while only about 13% of GDP is attributable to US exports. The S&P tends to be forward looking. It makes sense that if you are optimistic on the future of an investment, you’d want to buy before you anticipate the profits. Therefore, the appreciation of the S&P 500 is a measure of optimism for tomorrow, rather than a direct reflection of what is happening today. Finally, GDP measures all goods and services. The S&P 500 is a slice of some largest companies in our economy, rather than a mix of all sized companies.
While it may seem like the S&P and GDP should, and sometimes do, move in relation to each other, there have been many times where they seem to disconnect. This is simply because, the S&P is not GDP.
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or email@example.com. www.SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
Content in this material is for general information only and not intended to provide specific advice or recommendations for nay individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad and domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.