Why are the Stock Market and Economy Moving in Different Directions?
The coronavirus pandemic has ravaged every aspect of the United States and the conclusion of quarter two has revealed some interesting economic results. The juxtaposition of a thriving stock market with a fall in GDP and rise in unemployment has left many wondering what the actual state of the economy is. Understanding the interactions between the stock market and economy is key to understanding what has actually happened to both during this pandemic.
The stock market was extremely volatile throughout the height of the COVID-19 pandemic in the beginning of quarter two and is now sitting at a much higher level than many have expected. As recently as March, the oil market crashed into negative territory and sent the entire market into a panic. Within a day, however, the price rose back to pre-crash levels and within a few months improved drastically. Although not back to pre-pandemic levels, the oil price is trading within a reasonable range of its usual price points. Beyond the oil industry, the S&P 500 index similarly dropped considerably during the month of March. Since then, the S&P 500 has risen 20% (Elder, 2020). As of July 1st, the index was at 3115.86 points, which is only about 158 points lower than it was in the beginning of January (Marketwatch, 2020). Overall, the stock market took severe hits in mid-March amid the height of the pandemic, but has since made remarkable progress in returning towards positive growth. Although this may seem encouraging for a full market rebound, does the high performance of the stock market truly indicate the state of our economy?
The U.S Bureau of Economic Analysis has begun posting economic indicators from quarter two, which paints a very different picture than that produced by the thriving stock market. It is reported that 20.5 million jobs were lost in the second quarter. Unemployment rose from 4.4% to 14.7%, the highest jump in a single quarter since the Great Depression. Gross domestic product (GDP) growth rate has similarly declined by 5% in the second quarter. This is the sharpest decline in GDP growth since the 2008 financial crisis. All of these indicators point to one conclusion: the economy is doing poorly. If this is true, however, how can the thriving stock market be explained?
There has been a lot of government intervention involved in trying to reverse the negative financial and economic impacts brought on by this pandemic. On a global scale, central banks have increased bond purchases as well as eased policies in an effort to bring the stock market up. Domestically, it is expected that we will continue seeing the Federal Reserve buying United States bonds in an effort to maintain desirable treasury yield levels. Despite initial decline in the stock market, there has been an exceptionally fast rebound due to the increased liquidity present in the market. All of these government aids, however, may not be benefiting everyone in the economy. Millions of working Americans and small businesses have not been able to utilize these aid programs to support themselves and their families. The implications of non-essential businesses closing their doors for several months has created too big a financial burden for even the government to bear and aid. Although the government has created a $660 billion small-business relief program, there were few guidelines issued on how these funds were to be distributed. Data has shown that this program was not designed to take into consideration the relative needs of its recipients. Around 90,000 companies took part in this aid program without committing to rehire their workers or create new jobs. The mismanagement of this aid program has left many Americans without proper means to return to work or receive a paycheck. Given that this is the case, many Americans may be wondering how representative the stock market is of the economy's growth.
When examining the validity of economic indicators versus stock market changes, time must be taken into account. Unemployment is considered to be a lagging indicator, meaning that it represents data that we have already surpassed. The market, however, is much more focused on present occurrences. Randy Frederick, the Vice President of trading and derivatives at Charles Schwab commented, “the markets are always, always forward-looking, and the markets are trying to move ahead of the economy.” This means that the Federal Reserve, economists, and market analysts have had much more time to prepare for the disastrous economic numbers that were expected to emerge from quarter two. Mark Hamrick, the chief economic analyst at Bankrate.com explained in greater detail how the markets have been expecting the worst case scenario since March unemployment figures were released, and therefore had ample time to react accordingly. The main reason for the discrepancy between the stock market and economy’s performance lies in the fact that the market is able to react at a much faster pace with much more support. These conditions can sometimes be used to gauge expected economic performance in future quarters. The hesitation to accept this relationship at face value lies in the unstable nature of the COVID-19 pandemic. The Federal Reserve and Central Bank have kept the stock market afloat and helped it recover very quickly from the stark troughs experienced in mid-March.
There is an intersection between the stock market and economic growth that should be noted. Studies have shown that stock market growth might actually boost long-run economic growth (Levine, 1996). More specifically, the level of stock market growth may be closely correlated to expected economic growth (Levine, 1996). Although there is a great deal of empirical evidence to support this claim, the additional variable of a global pandemic may make this relationship harder to decipher. Under current circumstances, the wellbeing of both the stock market and economy are heavily dependent on what is to come in our current predicament.
The greatest determinant of whether or not the stock market will continue to trend upwards, with economic measures hopefully following suit, lies the future of the COVID-19 pandemic. In June many businesses and individuals felt hopeful that the reopening of businesses would spur enough economic growth to recover from the disastrous quarter two figures. Newest reports, however, are revealing the grim future of a once hopeful picture. A spike in COVID-19 cases in California, Texas and Florida at the end of June has led to these states once again going into lockdown with hopes of containing the spread of the virus. The prolonging of state-wide shutdowns will lead to further job losses and further contraction of the economy. The future financial well-being of the United States depends heavily on how states will choose to handle the rising number of COVID-19 cases in this second wave, as well as how long the shutdown will last.
Works Cited:
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Lockett, Hudson. “Wall Street Stocks Seal Best Quarter since 1998.” Subscribe to Read | Financial Times, Financial Times, 30 June 2020, www.ft.com/content/6d09858e-6dc8-4e74-bbcb-9f837e4aa7c8.
Rabouin, Dion. “Central Banks Worry Their $25 Trillion Coronavirus Stimulus Isn't Enough.” Axios, Axios, 10 June 2020, www.axios.com/central-banks-coronavirus-stimulus-c3ac705d-1e12-4740-82f6-bdb9668ae926.html.
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