I keep hearing the same question repeated. Why aren’t stocks down more? There are at least 40,000 newly unemployed, businesses are struggling, and unemployment and closures are tipped to continue to rise.

Retail spending is down by record amounts.

The NZX50 hit its low point of 8,499 on 23 March. A drop of 30% from its 21 February high.

As of May 13, when New Zealand transitioned to level 2, the share market has gone up 27% since the March low, and is only down 11% from the February high. So why are stocks now rising when more businesses are closing people spending less, and more people are being laid off?

There are a few reasons.

1/. The index fell 30%. That is pretty significant.

2/. The stock market is forward looking. The economy is backward looking. By default, the stock market is then not a accurate representation of the economy. The stock market is a prediction of how the economy will look in the future. If the stock market is going up, then investors believe the future looks better than the present. In this case, investors believed the initial 30% drop was too much, and have since changed their minds.

3/. The rich get richer. The wealthy have not been as affected by the rise in unemployment. The hospitality, retail and tourism industries have been hit the hardest. The majority of employees in these industries are not highly paid. By default, they are much less likely to be big share market investors. The majority of wealth in the share market is from those on higher incomes. So they continue to invest because they haven’t lost their jobs. This helps the market tick along better than expected in my opinion.

4/. The government stimulus package. The introduction of more money into the economy and subsidy packages have definitely helped in the short term.

5/. Bank savings are not cutting it. With interest rates so low, and going lower, people who traditionally relied on bank interest rates are taking on more risk in search of greater returns. This is dangerous, but helps explain an increase in stock prices.

6/. The last, and I think most relevant reason, is that only some of the NZX50 is doing well. The NZX50 is going quite well, but not all companies within the index are. The pain that petrol stations are going through is reflected in the share price of affected companies. As of May 13, Z is down 34% from February 21. Sky City is down 35%. Auckland international airport is down 31%. Air NZ down 53%. Sky TV down 42%. Tourism Holdings down 38%. Fletcher Building with no construction are down 40%.These numbers are much higher than the 11% drop of the index.

Basically, companies and industries that you’d expect to be down are still down by huge amounts. Down by well over the initial 30% drop off.

What is bringing the market up to just a 11% drop is the performance of companies not affected as much by Covid 19. As it turns out, a lot of these companies make up the top 10 within the NZX50. In other words, they are pulling the rest of the market up. The top 10 companies currently make up 52% of the NZ50 index, and have gone down an average of just 6.5%.

Companies such as A2 milk, Fisher and Paykel Healthcare, and Chorus have done exceptionally well as you’d expect. Whereas the big energy companies have only gone down by small amounts. Below is a summary:

So if you’re looking at the markets and shaking your head, they are working. The winners are being separated from the losers in this current market environment. The market is not broken. It is working with the information it has available, as it always does.

Look at the composition of the market. The companies performing the worst are smaller companies than the bigger companies who are performing the best. People mention Air NZ doing so badly so why isn’t the market impacted. Air NZ make up less than 0.7% of the index. The market is not wrong with the information available. The market is holding up much better than the economy thanks to two or three very big companies. That is all. The economy is still shot. The market agrees with that. Don’t think that the market doesn’t realise this. It does.

I see many people are waiting on the sidelines for the dead cat bounce, where the markets take another deep dive. Their reasoning being that the markets are overpriced. Maybe they are. But only if further information comes in to play as it always does. Based on the current information available, that everyone has access to, even with the huge spike in unemployed and business closures, the current price reflects that.

If unemployment rises more than expected then markets will go back down. What that point is is anybody’s guess. That’s why I prefer to always be in the game, so I don’t have to guess. I can experience the wins and the losses, and when the market wins more than it loses, as it consistently does, I like being a part of that game.

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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here