We hope everyone is coping well with our current lockdown. Hopefully we are more than halfway through and case numbers fall in the coming weeks. For those outside Auckland, the drop to level 3 offers some added freedoms (can't wait for takeaway Fridays myself).

As Phil and I continue to manage client portfolios through lockdown, we noticed the NZ share market jumped upwards as we returned to working from home. A similar, but much larger jump happened last year as we went into level 4 for the first time.

Throughout all of 2020, as COVID-19 spread across the globe, most of the people I spoke to didn't understand how share markets continued to soar. I can't pretend to know myself, although explanations always pop up in hindsight.

It is possible the collective wisdom of all investors worldwide looked past the economic fallout and correctly predicted where we would find ourselves this year. The recent job shortages and inflation fears come as economies strengthen again, more than a year since the big share market drop in Feb/March 2020. Who knows.

If we can take any lesson from these big swings, it is that you cannot predict where markets will go next. I would also add, due to the great complexity in economies and share markets, trying to make predictions based on a few factors is not advisable.

Below is a chart of the S&P/NZX 50 Index from the start of 2020 to now. This index represents the performance of the 50 largest publicly-listed companies in NZ. I have added two green lines representing when the first NZ case occurred and when our borders were closed. The gold bands represent times Auckland or NZ as a whole were in level 3 or 4 lockdowns.

Common sense suggests the sudden announcements of lockdowns, which clearly impact the economy, should crater share prices. However, this isn't what the chart shows. In fact, the lowest point reached was on the 23rd of March 2020, the day our first lockdown was announced.

Remember the first lockdown? I returned from a holiday in Japan (cut short) to find the supermarket shelves emptied and toilet paper a scarce commodity. Amidst all this panic, it was the absolute best time to be investing in NZ shares.

This isn't to say we should wait until lockdown to start investing. The sample size is small, and the rest of the chart shows no pattern whatsoever. It does suggest we shouldn't use information regarding COVID-19 to make investing decisions.

The best time to start investing is yesterday. The next best time is today.

Stocks and the economy

The state of the economy and the share market are linked, but not as closely as many believe.

Share prices are forward-looking, as investors make predictions about what will happen to a company's profits over the long-term. The current price of a company's shares reflect all investors collective knowledge and opinions related to the company's future earnings.

Figures for the economy reflect the state of businesses right now. This will affect the opinions of investors as they decide which shares to purchase and at which price. The two are not perfectly correlated.

A great analogy, provided by Ritholtz Wealth Management adviser Joshua Brown, compares the link to a woman walking her dog. You can listen to the 9-minute interview at NPR.

BROWN: And I’m now going to give you my favorite analogy. So a woman is walking through Central Park, and she’s got a dog. What’s a very active kind of dog?

VANEK SMITH: Oh, like a Jack Russell terrier or something like that?

BROWN: Fine. Jack Russell Terrier is great. If you just looked at her, what is she doing? She’s taking normal steps. She’s going in a straight line. She’s walking, you know, upright at a moderate pace – nothing terribly exciting. Then let your eyes pan down a little bit. Look at the dog. The dog is going crazy. It’s chasing birds. It’s digging up clumps of mud. It’s running at trees. It’s peeing all over the place. The dog is the stock market. The woman is the economy. The dog is chasing butterflies, then it’s sniffing itself, you know. So if you’re just watching the dog, you’re not watching the economy. You’re watching the manifestation of hundreds of millions of people’s greed and fear with buying and selling. But you’re not watching an actual representation of how the economy’s doing. So it’s important to understand that, yes, the stock market leads the economy and, to some extent, reflects the economy…

VANEK SMITH: Yeah, they’re connected, like the dog and the…

BROWN: Yeah, the dog’s going walk in the general direction that the woman walks the dog. So the economy and the dog – or the economy the stock market are somewhat connected. But they do not look the same. They do not act the same even if they’re walking in the same direction.

What this means for investors

The country moving into lockdown shouldn't affect our investment decisions. The COVID responses of other countries are equally irrelevant, as economies and share markets are too complex for these single-factor models.

When we decide to invest in riskier assets such as shares, we have to accept some times will be bad, even though most are good. We do this because over time the good outweighs the bad and we can earn a higher return. For most investors, this higher return is what will provide the retirement we spend decades working towards.

Knowing we don't need to time the market, correctly predicting when to jump in and out, makes this easier for long-term investors. Focus on the horizon and ignore the short-term noise.