Why is the market bullish?

“I keep hearing that the economy is in bad shape, so why is the stock market continuing to set new all-time highs?”

I’ve heard that question several times recently and thought it would be a great topic for this week’s column.

While there are quite a few factors that come into the full explanation, here are four possible explanations to consider:

The stock market is “future-looking”

Stock prices are not based on the current value of a company as much as they are on how that company will perform in the future. When trying to evaluate the value of a company’s stock price, the main criteria we look at is their expected earnings in the next 12-24 months.

For example, if you look at the share price of Tesla, it will clearly not line up with the number of cars that they’re selling each quarter. But the share price is instead based on the significant growth potential that the company has.

The markets setting record highs is not so much due to the fact that the economy is in great shape right now, but investors betting on a healthy economic recovery.

The stock market is dominated by the largest companies: Many of the largest companies by market cap such as Amazon, Microsoft and Walmart have done quite well during the pandemic.

These major companies (largely tech based) comprise such a large part of most market indexes that their strong performance more than offsets the decline of many smaller companies.

The economy isn’t as bad as we think

Excluding Canada, many other economies are doing OK right now. U.S. average home prices were up 7.6% in 2020 and consumer spending has remained strong. Sectors such as manufacturing, health care and certainly technology are all doing quite well too.

The IMF is projecting a 5.4% global growth rate for 2021.

The stock market might also be wrong too

While the majority of outlooks are positive for the coming year, there are still plenty of others who disagree.

The massive stimulus measures deployed around the globe last year may not be enough to keep the growth on track. Or the crippling debt that some have taken on might be too much to handle.

At the end of the day, the stock markets will continue to be volatile as they have in the past and future market corrections (and subsequent recoveries) are inevitable.

Instead of trying to predict where we are in the market cycle, sticking to a well-planned investment strategy is the key to long-term growth.

With interest rates at historic lows, most people have no choice but to invest in stock markets.

Just make sure you have a well thought out plan that aligns with your risk tolerance and situation, so you are not forced out (or scared out) at the wrong time.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.