Why the stock market and the economy actually aren’t disconnected
What’s up with this crazy stock market anyway?
Apple, Tesla, Zoom and their ilk have been going nuts, driving the Nasdaq and S&P 500 to record highs—and greatly enriching the billionaire class—(only to drop precipitously late this week.) All this while the economy is in recession and millions are unemployed—some even unable to put food on the table.
It’s yet another unsettling fact of life during COVID-19, though this piece seems particularly bizarre, nevermind unfair and even cruel.
So what to make of this so-called disconnect between the economy and stock market?
“The stock market and the economy are two completely different things,” says Barry Ritholtz, co-founder and CIO of Ritholtz Wealth Management. “While people assume that there’s some correlation, when you do a mathematical analysis the correlation is all over the place. 2020 is a unique year because not only is there a high level of inverse correlation, it’s the highest we’ve ever seen. The worse the economy has done, the better the stock market does.”
Actually it just follows that the stock market action would be particularly confusing during this particularly confusing, and unprecedented period in our history. It would be folly in fact, to expect a logical path.
Ironically for all we study and talk about the market, in many ways it remains a mystery. “Stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself,” writes Yale professor and Nobel laureate Robert Shiller in “Understanding the Pandemic Stock Market.”
Still, when you drill down and closely examine the markets (big hint here: overall, stocks really aren’t up), the economy and in this case, science, the picture becomes more clear. I should also point out that explaining what the stock market is doing at any specific point in time is always vexing, while understanding it in retrospect is a piece of cake.
For starters, the most basic reason people attribute to strong stock market performance, is that yes, the economy is weak right now, but that the market always looks forward and ergo stocks are up because at some point (soon?) we’ll be out of this COVID-19 mess and can get on with our lives.
Which is certainly true, though if that were the only driver, I would say the market would be up just modestly given all the uncertainty. Of course there are all kinds of other factors in play here.
Let’s go through some of them.
Much has been made of retail investors, (aka the little guy, aka you and me), swooping in to buy stocks this year. “I think it’s playing a real role, though it’s difficult to quantify,” says Liz Ann Sonders, chief investment strategist at Charles Schwab. She gives credence to remarks made by Joe Mecane, Citadel Securities’ head of execution services, who told