The two have been intertwined in the American psyche since the 1929 stock crash and the onset of the Great Depression. But stocks are not a reliable gauge of overall economic health.
The stock market looks increasingly divorced from economic reality.
The United States is on the brink of the worst economic collapse since the Hoover administration. Corporate profits have crumpled. More than a million Americans have contracted the coronavirus, and hundreds are dying each day. There is no turnaround in sight.
Yet stocks keep climbing. Even as 20.5 million people lost their jobs in April, the S&P 500 stock index logged its best month in 33 years. After a few weeks of wild swings, the market is down a mere 9.3 percent this year and 13.5 percent from its peak — what most investors would consider a correction. On Friday, after the government released the staggering unemployment figures, the S&P 500 closed up 1.7 percent.
Conventional wisdom would explain the market’s comparatively modest losses this way: Since markets tend to be forward-looking, investors have already accounted for what’s expected to be a cataclysmic drop in second-quarter activity and are forecasting a relatively rapid economic recovery afterward. The Federal Reserve’s actions have also bolstered investors’ confidence that the bottom won’t fall out of the market.
But the pandemic has also highlighted a deeper trend. For decades, the market has been growing increasingly detached from the mainstream of American life, mirroring broad changes in the economy.
“Wall Street has very little to do with Main Street,” said Joachim Klement, a market analyst at Liberum Capital in London. “And less and less so.”
Still, the market retains its grip on the collective imagination. From politicians and corporate executives to mom-and-pop investors, Americans have long relied on the stock market as a proxy for the U. S. economy — for reasons that are partly historical. Its crests suggested bright days ahead, while its troughs suggested a darkening outlook. The current economic fallout, however, could snap any illusions that the logic of the market is derived, in any consistent way, from real-world events.
Part of the reason is the makeup of the stock market, and the fact that the giant companies that make up the S&P 500 operate under very different circumstances than the nation’s small businesses, workers and cities and states. They are highly profitable, hold significant sums of cash and have regular access to public bond markets. They’re far more global than the typical American family firm.
