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How can the stock market soar with rising unemployment?
How long-term investors should position themselves amid an uncertain market
Dan Wiener, co-founder of Adviser Investments, discusses how to invest in the coming years, and which mutual funds will outperform, with Barron’s markets editor Ben Levisohn, Barron’s reporter Carleton English and Barron’s associate editor Jack Hough.
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We've all seen the numbers — more than 30 million people have filed for unemployment so far during the coronavirus pandemic, and this is certain to cause the near record-low unemployment numbers we've seen recently to rocket higher.
Well, that's exactly what is expected to happen. According to the Congressional Budget Office (CBO), unemployment is expected to spike from 3.8% in the first quarter of 2020 to 14% in the second quarter. Unemployment is expected to spike to 16% in the third quarter before retreating to 11.7% in the fourth quarter. Perhaps the most alarming statistic to long-term investors is that the CBO expects unemployment to remain elevated at a 10.1% level through 2021 and only decline to 9.5% by the end of 2021.
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The point is that if you think things will just snap back to normal after the second quarter — think again.
Why is the stock market rallying?
Since bottoming on March 23, the S&P 500 index has rallied by nearly 30%. To be sure, it's still roughly 15% down from its pre-crash highs, but this is a big upward swing, especially considering the grim unemployment projections.
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The short explanation of why the market has rocketed higher over the past six weeks is that the stock market is a forward indicator, meaning that it derives its value from expectations of how things are going to be in the future. Without turning this into an economics class, stocks get their value from the present value of all their future expected cash flows.