We’ve said it before: The stock market is not the economy.
Usually, this simply means that fluctuations in the markets may have little to no real bearing on the underlying realities we think of as making up the economy. Or that there are many important structural factors that make the markets’ outlook different from how ordinary citizens view the country’s overall economic health.
But now, those usual bromides risk wildly understating the disconnect. In the time of COVID-19, the stock market couldn’t be more divorced from the United States’ broader economic situation. Although the S&P 500 tumbled sharply in March, as the coronavirus shut down large swaths of the economy, it had made back almost all of its losses by the first week of June — before dipping again and then quickly rebounding yet again.
Even beyond the markets, there has been some data to suggest that the worst fears about the economy in late March and April were too pessimistic. (Take May’s jobs report, for instance, which showed a surprising decline in unemployment even after accounting for a classification problem with laid-off workers.) But the overall state of unemployment is still quite bad by historical standards, which mirrors numerous important economic indicators that are almost uniformly down — to a significant degree — from last summer:
Obviously, not every core indicator has dropped off a cliff in the face of this recession. Inflation, as measured by the sticky-price consumer price index (excluding ever-volatile food and energy expenditures), has dipped some since February — from 2.8 percent year-over-year to 2.1 percent — but remains in a relatively normal range. New building permits (a sign of construction investment and activity) have rebounded from an initial dip and are almost back at last year’s level. And measures of credit risk, such as the TED spread, have stabilized, indicating a low implied risk of commercial-bank defaults.
But employment rates, oil prices, consumer confidence and many other measures paint a clear recessionary picture. Even corporate earnings — which in theory help dictate the prices of shares on the market — suffered their worst quarter since 2008. (This is what has driven forward-looking price-earnings ratio forecasts for the S&P skyward.)
And yet stock indices continue to rebound much faster than the rest of the economy.
Why? As is usually the case in economics, it’s complicated — and everyone has a pet theory. A few include the idea that investors are betting on a quick “V-shaped” recovery (rather than the longer, slower “swoosh” shape many economists have predicted) and banking on corporate profits eventually rebounding in the medium and long run. (And why not? The Federal Reserve’s actions have made it clear this is a priority.)