In cities and towns across the U.S., people have taken to the streets to draw attention to ongoing issues of racism and police misconduct in response to the death of George Floyd in Minneapolis on May 25. Demonstrations have, in some cases, led to the imposition of curfews, the introduction of the National Guard, and comments from former presidents. The only place the protests haven't been felt, it seems, is Wall Street.
During periods of social upheaval, it can appear callous or strange that the market barely reacts. But history shows this type of political unrest in developed countries has not had much impact on stock prices. Even in the late 1960s, during similar periods of protest, the market rose.
That's because investors' expectations for corporate earnings and economic growth are the main drivers that push the market higher or lower, rather than short-term events, explains Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
"These protests are a very important part of the American process and they are highlighting an extremely important issue," Zaccarelli says. Yet "the fact that people are assembling in the streets, that in and of itself doesn't affect corporate earnings to move the market up or down."
Here's why experts suggest these demonstrations aren't likely to derail the economy or make the stock market falter.
The stock market does move up and down based on daily news and events, but that's usually because traders are trying to gauge whether that latest information changes their expectations for the future. Generally speaking, market participants are looking ahead by about three to six months, Zaccarelli says.
The S&P 500 has risen 2.6% so far this week, despite continuing clashes between protesters and police and damage to property.
While no one can predict how long the current unrest will last, for now, it hasn't had a broader economic impact. Though some retail establishments have been looted and others have closed, that's not likely to affect the pace of gross domestic product (GDP) growth. And companies in the retail sector will have insurance against losses on some stores, Steven DeSanctis, Jefferies equity strategist, told CNBC.
The bigger unknown is whether the protests will lead to a surge in coronavirus cases and that will mean that the economy takes longer to rebound.
"The big thing with social unrest is in two weeks from now, if we get an uptick in the virus and that delays openings, that is something that impacts markets," DeSanctis said.
This is hardly the first time that the stock market hasn't been affected by social unrest in the U.S. "History shows markets look through many sorts of tumultuous events and have done so for decades," Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients on June 1. "That may seem counterintuitive, and perhaps not even 'fair,' but it's absolutely true."
Colas examined past periods of social or political turmoil, including 1968 (when both civil rights leader Martin Luther King Jr., and Sen. Robert Kennedy, a presidential candidate, were assassinated), late 1998 and early 1999 (when President Bill Clinton was impeached), and 2011 (the Occupy Wall Street movement). In each of those past periods, stock prices rose.
Like DeSanctis, Colas said that what matters most to traders is how and when the U.S. economy restarts in the wake of coronavirus-related shutdowns.
The long-term pace of economic growth, rather than events happening in the short-term, will ultimately drive the stock market higher or lower, Zaccarelli says. Wall Street already believes a recession is underway, even if it could be the quickest in history.
The fact that the market is more focused on the future than the present has confused many bystanders in recent months. "The question we get more than anything is: How can the stock market be doing so well when the economy is doing so badly?" Zaccarelli says.
Between February and March, the S&P 500 fell nearly 34% as traders started to take account of the potential toll of the coronavirus pandemic. Since March, however, stock prices have surged and now the S&P 500 is less than 8% below its February peak — even as economic reports continue to show just how much damage this outbreak has caused, like the 40 million or more people who have filed for unemployment.
Recent gains in the stock market reflect a bet that U.S. economic growth has already started to accelerate again, he adds.
"The stock market is trying to predict the future," Zaccarelli says. "Of course, we don't know what exactly will occur but people are anticipating continued good news in the future."
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