Here’s why there’s a ‘huge disconnect’ between stock market and economy

A pedestrian passes by the New York Stock Exchange, NYSE, in New York on March 17, 2020. (Photo by Michael Nagle/Xinhua via Getty) (Xinhua/Michael Nagle via Getty Images)

Xinhua News Agency

Great Depression-era levels of unemployment. An economy in downward spiral. More than 100,000 dead from a killer virus. Cities in flames amid widespread civil unrest.

And a stock market that marches ever higher.

The recent U.S. market turmoil from the coronavirus pandemic feels like eons ago.

The S&P 500 cratered 34% from its high in mid-February to its trough on March 23, the quickest decline of its kind in history.

Yet stocks rebounded with vigor, despite bleak economic news and protests spreading across the U.S. after the death of George Floyd, a black man, while being subdued by a white police officer.  

As of Tuesday’s market close, the S&P 500 had swelled 38% from its bottom, within reach of fully erasing its recent losses. In fact, this has been the best 50-day rally in the history of the U.S. stock index.

The S&P 500 was up another 1% as of noon ET on Wednesday.

It’s a “huge disconnect” from reality on the ground, said Robert Jenkins, head of global research at Lipper.

“The disconnect from basic human suffering is shocking,” Jenkins said. “It gets more and more insane by the day.”

Today vs. tomorrow

However, the divergence makes sense for several reasons, according to market experts.

Namely, the stock market is not the economy.

Stock investors are looking beyond present conditions toward what they believe will happen in the future — which they’re currently viewing with optimism, experts said.

“One is looking at today, the other is saying where am I going,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said of the difference between the economy and stock market.  

“The market is saying, ‘We know where we are today, but where are we going tomorrow? In this case, tomorrow is 2021,” Silverblatt said.

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The Covid-19 public health crisis pushed states to shutter broad swaths of their economies starting in mid-March to quell the spread of the disease.

Nearly 41 million Americans have since filed for unemployment benefits, shattering prior records.

The country’s 14.7% official unemployment rate in April was its highest level since the Great Depression, when it peaked above 25%. The rate will almost undoubtedly be higher when the Labor Department reports data for May on Friday.

Meanwhile, gross domestic product, a measure of  U.S. total economic output, dropped 5% in the first quarter of 2020. The Federal Reserve Bank of Atlanta estimates GDP may crater nearly 51% in the second quarter.

Yet, the S&P 500 is down just 4.6% since the beginning of the year.

“You’ve got to be kidding me,” Silverblatt said. “4%? You meant 40%.”

Investor sentiment has been buoyed by phased state reopenings that have begun across the country and the expectation of a vaccine, which would help normalize the national economy as social distancing measures end, experts said.

That could point to a rebound in consumer spending, the lynchpin of the U.S. economy, and retail sales, they said.

The widespread protests currently dominating the news cycle are unlikely to have a big effect on the stock market unless investors see a risk of long-term economic damage, experts said.

‘Old news’

A 34% decline in the S&P 500 wasn’t reflective of the pandemic’s likely effect on the long-term U.S. economy, said Preston Caldwell, senior equity analyst at Morningstar.

“I would say the economic data is old news for the market’s purposes,” Caldwell said. “Right now, most market participants are looking beyond the [second quarter] to try to understand the second half of 2020 and beyond.”

Meanwhile, a survey of financial advisors suggests they’re taking a rosy view over the long term.

A quarter of advisors expect to increase their stock recommendations to clients over the next year, according to a joint survey published Wednesday by the Financial Planning Association, Janus Henderson Investors and the Journal of Financial Planning.

Government stimulus measures also seem to have assuaged some investor fears, experts said.

The CARES Act, the $2.2 trillion coronavirus relief law enacted in late March, issued one-time stimulus payments to American households, expanded unemployment benefits and created a forgivable loan program for small businesses.

The Federal Reserve has also used aggressive measures to make sure businesses and municipalities can access ready cash.

Strength amid some of the market’s largest companies — the so-called FAANG stocks, represented by Facebook, Amazon, Apple, Netflix and Alphabet (Google’s parent company) — have also helped to offset weakness in other sectors like energy, Jenkins said.

However, it’s not a foregone conclusion that the stock market surge will last, especially if the economic turnaround investors envision doesn’t materialize, experts said.

A second wave of the coronavirus could require states to implement stricter social distancing measures and dampen consumer spending.

A failure to pass more government stimulus measures may also diminish investor sentiment, since consumers would have less cash flow to inject into the economy, experts said.

The $600 weekly enhancement to unemployment benefits is scheduled to end July 31. There may not be another round of $1,200 stimulus checks for individuals. And many small businesses that received Paycheck Protection Program loans have almost spent the entirety of their government funding.

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