The S&P500 and the Value of American Business

I’m writing this on March 20. By the time this shows up on my blog things might have changed drastically but I am guessing not. 

The topic never goes away. Many of us have money in the US stock market. Some of us buy individual stocks and we watch how Amazon or Microsoft stock prices change from time to time. Others have mutual funds that allow them to own a whole portfolio of stocks. We don’t much care if one stock goes down so long as the value of all the stocks rises. We track how our mutual funds are doing. The Dow Jones and S&P 500 averages tell us how a large groups of stocks are doing.

The market closed down on Friday, March 20, with the S&P value at 2304. That means that after rising to as high as 3400 earlier this year, the S&P value is now down to about what it was in 2017. Mathematically, we could say the S&P 500 has given us zero growth over the past three years. We could say the S&P 500 is now roughly 1100 points lower than it was a month ago – a net loss of about 32%. In 2010, the value was about 1200. You could say that in the past 10 years the S&P 500 almost doubled – even at the low value of 2300 today.

What do we make of all this? Some people tell us that indices like the S&P and DJ tell us the value of corporate America. Does the value of all those buildings and computers and software and equipment jump around like the stock market? Probably not. 

Someone might say that it is not really the fundamental values of all that stuff but more so the expected future values of the profits all that stuff might generate. This seems to make more sense. If the future looks scary for firms, then maybe their profits will fall and people will not value the stocks as much. When we are highly optimistic about the future, then we buy stocks and are willing to pay higher prices because we think we will share in the good results that come.

Since expectations about the future can be pretty fluid, stock markets can jump around a lot despite the fact that the value of the underlying assets of the companies has not changed very much.

Where does that put us? For one thing, it helps to not panic. Expectations presently are wildly pessimistic about business and the future of profits. If you believe it is better to sell stocks when their prices are high, then you probably do not want to sell stocks at these very low values. Of course, you might not have a choice. Maybe you need to sell stocks to pay for your kid’s education or to finally get that Beamer you always wanted. 

But notice there are always choices. Maybe it would be better to sell your antique doll collection than to sell your stocks. Maybe this is a good time to borrow to make your purchases. Maybe grandpa will give you a loan. Selling stock right now is not a great idea.

The big question is how long it will take before future expectations and stocks return to more normal values. If the time is short, there are lots of ways to avoid selling stocks. But if it takes 5 or 10 years, then maybe our options are more limited. Especially for you older folks – will you be alive when the market becomes more normal again?

Sadly, we don’t know the timing. The health/economic challenges we face now are new to us. But I can say that the stock markets, like your weight measured daily, can rise and fall, and most of us should just look away from all that noise. It will drive you crazy but it really has almost nothing to do with you. The stock market values each day during such a pessimistic time are bound to be disconcerting. But they are not telling you what American business is worth, and they tell you very little about what they will be worth in the future.

One caveat. We cannot be sure how the political responses to the coming recession and Covid will permanently impact impact government control and regulation over companies. It is easy to see why that could negatively impact productivity and the value of capital. 

Hang in there for now, and don’t do anything crazy.