Expert Commentary

The stock market is not the economy. Right? Here’s what the research says.

“The stock market is not the economy” has been the phrase of the COVID-19 recession among business journalists and economists. Here's the research on the disconnect between stocks and Americans' personal economies.

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(Hans Eiskonen / Unsplash)

“The stock market is not the economy” has been the phrase of the COVID-19 recession among business journalists and economists.

Guests on cable news networks — CNBC, CNN, Fox News, MSNBC and others — uttered the phrase about 100 times over the past year, according to the Internet Archive, which has a massive repository of cable news transcripts. That’s up from 17 instances in 2019, 59 in 2018 and a handful back to 2011. The phrase first appeared as a Google search in May 2009 and hit peak popularity in November 2020.

Nobel Prize winning economist and New York Times columnist Paul Krugman wrote about the slack relationship between stock markets and the economy this past August, concluding that “stocks are up. Why, exactly, should we care?” Kai Ryssdal, host of the American Public Media business show “Marketplace,” has been a fan of the phrase since at least 2007.

Robert Reich, a public policy professor at the University of California, Berkeley and former secretary of the U.S. Department of Labor, offered a stark data-driver reminder in a Dec. 16 tweet:

The richest 0.1% own 17% of stocks

The richest 1% own 50% of stocks

The bottom 50% own 0.7% of stocks

Repeat after me:

The stock market is not the economy.

— Robert Reich (@RBReich) December 16, 2020

Most times when people say “the stock market is not the economy,” they mean the day-to-day performance of major stock indices that track the value the nation’s biggest firms, like the S&P 500 and Dow Jones Industrial Average, bears little-to-no reflection on what’s happening in most Americans’ lives.

As the nation struggles to make sense of hundreds of President Donald Trump’s supporters sieging the U.S. Capitol on Jan. 6, destroying federal property and leading to five deaths, including a Capitol Police officer, the disconnect between stock indices and the real world perhaps feels particularly acute.

With investors envisioning rosier economic times ahead, the S&P 500 and Dow Jones hardly registered a blip in the days following the historic lawlessness in Washington, D.C.

Stock markets, in short, often seem to have no apparent attachment to what Americans are going through, economically, politically and personally.

“Currently, the stock market is being buoyed by the belief that the [Federal Reserve], backed by the incoming administration, will continue to pump cash into the markets,” University of Warwick economist Roger Farmer told Journalist’s Resource by email Jan. 8. “While unemployment is high, as it still is today, the cash injections will fuel stock market growth and the wealth created by that growth will fuel increases in consumer purchases and a steady reduction in unemployment.”

A variety of data show the stock market has not reflected the broader economy during the coronavirus recession. The S&P 500 and Dow Jones both reached record highs at the end of 2020, roaring back from steep losses in March brought on by pandemic-related economic shutdowns.

The rebound coincided with the Federal Reserve’s March 23 announcement that it would buy corporate debt and other types of securities — something the U.S. central bank never did during the Great Recession — and its April 9 announcement that it would increase those purchases, according to “When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response,” a National Bureau of Economic Research working paper published in May 2020.

The unemployment rate mirrored the equities trend, spiking as stock indices fell. In April 2020, the U.S. Bureau of Labor Statistics reported the unemployment rate at about 15%, with the real rate potentially near 20% due to a BLS misclassification error.

By December 2020, the unemployment rate had improved to 6.7%, roughly double the 3.5% rate in February, though employers shed 140,000 jobs in that last month of the year. The unemployment rate for Hispanic workers remains high at 9.3% and higher still for Black workers, at 9.9%. For white and Asian workers, the unemployment rate is about 6%.

As the major stock indices regained their value and then some, 5 million more Americans were unemployed at the end of 2020 compared with the start of the year.

Claims for unemployment benefits likewise skyrocketed in late March. New weekly claims went from about 282,000 in early March to nearly 7 million by the end of the month, according to the U.S. Department of Labor. Since late August, new claims have hovered between 700,000 and 900,000 a week. New claims for each of those weeks would have been historically high if not for the record-setting spike in late March.

Before the coronavirus recession, the number of initial weekly jobless claims had never topped 695,000 — the figure the Labor Department reported October 2, 1982, during the worst part of a recession lasting through that November. As the major stock indices recouped their losses in 2020, personal income fell 1.1% in November compared with October and consumer spending was down 0.4%, according to the U.S. Bureau of Economic Analysis.

Finally, a federal moratorium on evictions was extended through January when Trump signed a $900 billion stimulus package into law. Some states have enacted their own halts on evictions that will continue past that deadline. Eviction isn’t just about losing the roof over your head — it can lead to depression, research shows, and can reduce access to clean water. Despite the federal moratorium, which has been in place since September, some renters still have been kicked out of their homes as landlords across the country sue to challenge the moratorium.

Why hasn’t stock market performance reflected Americans’ personal economic experiences during this recession? Personal savings rates shot up in April and remain high — about 13% compared with roughly 8% in 2019 — but the Federal Reserve has kept interest rates low. Despite some Americans saving more, those low interest rates may be pushing some money into stocks where investors can get better returns, reports AxiosDion Rabouin.

Another reason is that industries the pandemic recession has hit hard, like retail and dining, make up a small share of the total value of the major stock indices, as veteran investor Barry Ritholtz explains in an August 2020 Bloomberg Opinion column. A few major tech companies, including Alphabet, Apple and Facebook, are much more important to market performance and, likewise, “the pandemic lockdown in the U.S. has benefitted the giant tech companies’ sales and profits,” Ritholtz writes.

“If the administration continues to fund its spending by borrowing, and if the Fed continues to monetize the debt, eventually the pressure on the markets will cause long-term interest rates to rise and an inevitable surge in inflation,” according to Farmer. “That last part does not have to happen. But a government that gets used to borrowing to fund its expenditures is playing a dangerous game.”

It’s important to note that the Federal Reserve can make policy choices that, by and large, aren’t subject to political forces. The central bank can buy corporate bonds and it can keep interest rates low without having to pass legislation through Congress. Large-scale, meaningful measures that many economists have found helped average Americans — like financial relief to households and small businesses hurt by the pandemic — happened this past March but further relief packages were bogged down by a politically divisive legislative atmosphere throughout most of 2020.

What the research says

Putting a global point on it, the authors of the April 2020 NBER working paper, “Corporate Immunity to the COVID-19 Pandemic,” examined stock price data from 6,000 firms across 56 countries covering the first three months of 2020. They ask “which firm characteristics make some companies more ‘immune’ to the COVID-19 shock than others?” Among the answers: Firms that were better prepared with “more cash, less debt and larger profits” performed better than those caught off guard. And those with suppliers and customers in regions less affected by the pandemic also had better returns.

“Is anything weird about the stock market behavior in the time of COVID-19?” ask the authors of “The Stock Market Is Not the Economy? Insights from the COVID-19 Crisis,” a Centre for Economic Policy Research working paper from June 2020. They find that “it was not the situation of countries before the crisis that influenced the reaction of stock markets, but rather the health policies implemented during the crisis to limit the transmission of the virus and the macroeconomic policies aiming to support companies.”

All of the above sheds light on why stock indices and markets can soar as millions of Americans hit financial lows during this unique coronavirus recession. “While pandemics are comparatively rare, and severe ones rarer still, I am not aware of a historical episode that can provide any insight as to the likely economic consequences of the unfolding global coronavirus crisis,” World Bank Chief Economist Carmen Reinhart explained in a March 2020 Project Syndicate column. “This time truly is different.”

Stock markets might not precisely track the nation’s overall economic health, but that doesn’t mean stock markets haven’t influenced — and been influenced by — the broader economy during past financial crises not caused by a once-in-a-lifetime pandemic.

The stock market and the unemployment rate are like two people walking down the street, tethered by a rope, Farmer explained: “When the rope is slack, they move apart. But they can never get too far away from each other.”

Take the Great Recession — the longest postwar recession in U.S. history, spanning December 2007 to June 2009 and followed by a steady but slow employment recovery upended by the pandemic. That recession was spurred by a toxic brew of complex securities backed by high-risk home mortgages. But the magnitude of the recession could have been predicted by the stock market crash that happened in the fall of 2008, as Farmer found in “The Stock Market Crash Really Did Cause the Great Recession,” published March 2015 in the Oxford Bulletin of Economics and Statistics.

In his analysis of S&P 500 performance and national unemployment, Farmer establishes that a “big stock market crash, in the absence of central bank intervention, will be followed by a major recession one to four quarters later. Further, the connection between changes in the stock market and changes in the unemployment rate has remained structurally stable for seventy years.”

In a February 2020 NBER working paper, “Stock Market Wealth and the Real Economy: A Local Labor Market Approach,” economists show that high stock values can, over time, lead to slightly more employment. They note that one major challenge among academics is figuring out whether the stock market performance leads people to buy more or fewer goods — and, in turn, leads to more or fewer jobs — or whether stock market performance predicts, rather than directly affects, changes in productivity, income and consumption. In other words, does stock market performance make people change their consumption or does it predict consumption changes before they happen?

The question remains unsettled, according to the authors. For their part, they examine the ratio of stock market wealth to earnings, market returns, employment and payroll levels across the roughly 3,100 counties in the U.S. from 1989 to 2015. They use county-level data on income dividends from the IRS, along with regulatory documents, and find that more stock wealth in a county is linked to increases employment and payroll levels there. But the Federal Reserve can set monetary policy that affects employment regardless of stock market fluctuations, and improvements in stock valuations can take a long time — up to two years — to have an effect on jobs, the authors find.

“This pattern suggests that large stock price declines that quickly reverse course — such as the stock market crash of 1987 or the flash crash of 2010 — are unlikely to impact labor markets, whereas more persistent price changes — such as the NASDAQ boom in the late 1990s or the stock market boom during the recovery from the Great Recession — have more sizeable effects,” they write in an updated version of the paper from September 2020.


When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Valentin Haddad, Alan Moreira and Tyler Muir. NBER Working Paper, May 2020.

Corporate Immunity to the COVID-19 Pandemic

Wenzhi Ding, Ross Levine, Chen Lin and Wensi Xie. NBER Working Paper, April 2020.

The Stock Market Is Not the Economy? Insights from the COVID-19 Crisis

Gunther Capelle-Blancard and Adrien Desroziers. Centre for Economic Policy Research Working Paper, July 2020.

The Stock Market Crash Really Did Cause the Great Recession

Roger Farmer. Oxford Bulletin of Economics and Statistics, March 2015.

Stock Market Wealth and the Real Economy: A Local Labor Market Approach

Gabriel Chodorow-Reich, Plamen Nenov and Alp Simsek. NBER Working Paper, February 2020. September 2020 update.

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