Small Business Owner

Small Business Watch: Stock Market As a Forward Looking Mechanism

‘If investors tried to come up with an index of mom-and-pop businesses, it would show devastation far worse than what we saw in the stock market, and it would still be down dramatically today,”

Jim Siegel, the professor of finance at the University of Pennsylvania’s Wharton School of Business in an interview with MarketWatch says the U.S stock market's impressive recovery doesn’t reflect the true reality of the economy. Siegel is widely known for predicting that the Dow Jones Industrial Average DJIA, +3.15% would see 20,000 at the end of 2015.

The S&P 500 has been on the rise due to technology companies making their presence on market. The grim reality is small businesses have taken a massive hit due to this recession. The comparison between Wall St and Main St are night and day.

  • May shows the U.S added 2.5 million jobs in May. This number is up from the 20.7 million jobs lost in April.
  • The muder of unarmed black man, George Floyd at the hand of a white police officer is at the pulse of the U.S and the world. As long as businesses keep resurging and opening their store fronts, the stock market will keep rising and look past the international protests.

“The stock market is a forward looking mechanism; the value of stocks depends not on the earnings of one year,” said Siegel.

Siegel says that 10% of a stock’s price was attributable to earnings over the next 12 months. This means any short-term geopolitical turmoil was unlikely to derail the stock market’s ascent over an extended horizon.

  • As long as earnings returned to normal in the distant future, equities were likely to keep trucking on.

“That is one of the major reasons the stock market should not experience a sustained sharp drop,” he says.

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