We have just finished one of, if not the very, weakest quarters in history. The corona virus is still raging. Millions have lost their jobs. Yet the stock market continues to rise, recovering from its lows hit early this year. Thus, the question is, why? There are many possible explanations for the equity market's resilience, but we will pick just two of these. First, the markets are not looking at today, but the future. And those buying stocks are predicting a brighter future. To that end, the stock market has a history of doing well in troubled times, with many analysts citing 1968 as an example. The year 1968 was a year of escalating war, assassinations, civil unrest, and more. Yet stocks that year rose almost 8.0%.
Secondly, the medicine the Federal Reserve has applied to the system favors stocks. Record low interest rates discourage investors from parking cash. They are looking for greater returns and, in the long run, stocks have provided those returns. You might ask, what about the average American, who is likely to be a bit more risk-averse in today's challenging environment? Are consumers that bullish on the stock market?
We would argue that the average American is also bullish about the future. But they are taking the Fed's medicine and using it to purchase homes instead of stocks. If you want to look at one investment that is even hotter than stocks, it is real estate. Recently, a Gallup poll confirmed this concept. The poll showed that real estate was the number one long-term investment favored by Americans and stocks came in a distant second. Thus, the big institutions are buying stocks, but the average consumer is putting their money in a place they can call home, at record low interest rates.