Leave the market aphorisms to your grandparents

Mish Schneider is the director of trading research and education at MarketGauge.com.

There is a plethora of sayings related to trading and the stock market.

Expressions like “If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks” or “Investing should be more like watching paint dry or watching grass grow”.

Both of those cliches may have applied to your grandparents’ portfolios but, in today’s world, not so much. We believe you should not take 20% losses because we do not believe in passive investing.

"We believe you should not take 20% losses because we do not believe in passive investing"

Furthermore, considering the extraordinary rise of retail investors, the popularity of bitcoin, ARK investments, and the Reddit group, if you think investing should be like watching paint dry, then you are missing out on some of the best active, profitable, and volatile trading opportunities.

Here is another one. “Sell in May and go away.” Had you done that in May 2020, you would have not only gone potentially broke, but you would have also sorrowfully failed to participate in what turned out to be a 40%+ gain in the S&P 500.
However, I wish to write about a pet peeve aphorism of mine: “The Stock Market Is Not the Economy.”

Since COVID-19, analysts and talking heads have been throwing around this expression a lot! Among the top media channels, that phrase was uttered hundreds of times. Which reminds me of another hackneyed expression: “If I had a dollar for every time a media spokesperson said, ‘the stock market is not the economy’, I’d be…”

Now, while it’s true that stock markets often seem to have no apparent relationship to what people are going through, economically, politically, and personally, the phenomenon we have witnessed during COVID offers us a new reflection on that statement.

“Stock markets might not precisely track the nation’s overall economic health, but that doesn’t mean stock markets haven’t influenced — and been influenced by — the broader economy during past financial crises not caused by a once-in-a-lifetime pandemic.” Clark Merrefield wrote in The Journalist’s Resource on 11 January 2021.

"Stock markets might not precisely track the nation’s overall economic health, but that doesn’t mean stock markets haven’t influenced — and been influenced by — the broader economy" - Clark Merrefield, The Journalist's Resource

Once stimulus money started coming into the economy last March, people overall spent less by staying at home. The rate of savings shot up as more people began to put money in the market as the only place they could get any returns. Tech stocks soared starting in the spring as people dined out less and zoomed at home more. This certainly reflected the economy and real world conditions.

What really got me thinking that this adage does not tell the whole story is that once autumn hit, money began to rotate into small caps, transportation, and retail. As people were still at home, the market anticipated that economy and these other sectors would come back.

As we headed into 2021, we have been seeing more of that rotation with airlines, cruise lines and many brick and mortar retail stocks beginning to gain buyers. That reflects the optimism in the economy and not necessarily the great disconnect.

Sure, the market soared to new highs while the unemployment numbers have yet to recover. That is because the market is forward thinking while it mirrors the return of optimism.

"The market is forward thinking"

The market is a growth momentum barometer. It reacts to the rate of change. If people are buying more, traveling more, working more, investing more, we see that in the market. Although a trip to the mall may not show up in the stock market right away, should the rate of change in retail spending impress, the US GDP expands, which does indeed show up in the market.

So, before you hear yourself saying“It’s the economy, stupid!" or “A bear market is one that cannot rise even on good news,” think again. If this is your trading plan, then you must also tell yourself that, “Every dog has its day!”