What is going on with the stock market? Despite some nerve-racking plunges, investors seem remarkably cheery. If you only paid attention to the stock market you wouldn’t know the broadest measure of unemployment and underemployment was 21.2% in May. Of course, the stock market isn’t the economy. Still, the disconnect is disconcerting.
Wall Street analysts highlight three factors behind the market’s strength. First, the reasonable belief that the Federal Reserve will do whatever it takes to keep Corporate America in business and the economy afloat. Second, many big publicly traded companies look to come out of the crisis even more dominant than before. Think Facebook, Apple, Google and Amazon.
The third factor is new: The rise of stock trading by individual investors. Somewhat reminiscent of the day-trading phenomenon of the late 1990s, the current symbol of active stock picking by individuals is David Portnoy, founder of Barstool Sports. Portnoy has garnered much attention with his outrageous comments on investing, most notably by dissing Warren Buffett, the legendary long-term investor. “There’s nobody who can argue that Warren Buffett is better at the stock market than I am right now,” tweeted Portnoy. “I’m better than he is. That’s a fact.”
Good for his company’s brand, sure. Investing reality, hardly. Anyone who has lived through stock market peaks and bubbles bursting can’t help but think this kind of hubris signals a market top, even though a Goldman Sachs recent report calculated that individual investors are doing well with their picks. More importantly, most individuals are exposed to the stock market through their retirement-savings plans. The savings is invested in target-date funds or similarly diversified portfolios, while portfolios are automatically rebalanced to keep the desired asset allocation.
Personally, I’m skeptical about current stock market valuations and the disconnect to the economy. That said, what if you do want to pick stocks? Investing can be fun, which is why the money that goes toward stock picking should be from your play-money budget, not your retirement savings, college education fund, mortgage down payment and emergency funds. I’d also resist the siren song of active trading.
Investing maestro Leon Levy stressed the importance of coming up with a good investment idea, keeping a long-term perspective and maintaining the discipline of your investing framework. Sound advice. I’d add keep the bets small and have fun.
Chris Farrell is senior economics contributor, “Marketplace,” and Minnesota Public Radio.