The Economy and the Stock Market - Why the disconnect?
Since the coronavirus pandemic erupted, tens of millions of Americans have lost their jobs. Fortunately, businesses are slowly rehiring as states allow employers to reopen. The historic unemployment level threatens the economy's recovery. The Federal Reserve has highlighted precipitous declines in consumer spending, domestic tourism, manufacturing activity and agricultural production.
But even as unemployment has skyrocketed over the past few months and the economy remains stuck in a recession, the stock market has rebounded strongly from its March 2020 lows. How can we understand this disconnect between our economy and the stock market?
First, stock prices are a leading indicator; that is, they tend to rise or fall in advance of improving or weakening economic conditions. Rising stock prices mean an economic recovery is coming.
Second, a stock's price reflects the future cashflows investors expect to receive. If investors see a quick recovery in profits after the pandemic, the stock price won't fall much, even if short-term profits drop significantly.
Finally, the companies driving the major stock market indexes - Amazon, Facebook, Google, Apple, etc. - operate globally, and their success isn't dependent on the strength of the US economy alone.
So, for better or worse, the stock market's disconnect from the economy shouldn't be surprising.
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