The Stock Market & the Economy: How Are They Related?
Itay Goldstein is the Joel S. Ehrenkranz Family Professor in Finance at the Wharton School of the University of Pennsylvania. He also coordinates the Ph.D. program in Finance and holds a secondary appointment as a Professor of Economics at the University of Pennsylvania. Professor Goldstein is a director of the American Finance Association and the Executive Editor of the Review of Financial Studies. In addition to top academic journals, his research has been featured in The Economist, The Wall Street Journal, Financial Times, Forbes, Bloomberg and National Public Radio.
Overview
The Economy Is A Mess. So Why Isn’t The Stock Market? Because the stock market is not the economy. Usually, this simply means that fluctuations in the markets may have little to no real bearing on the underlying realities we think of as making up the economy. Or that there are many important structural factors that make the markets outlook different from how ordinary citizens view the country’s overall economic health.
But now, those usual observations risk wildly understating the disconnect. In the time of COVID-19, the stock market couldn’t be more divorced from the United States’ broader economic situation. Employment rates, oil prices, consumer confidence and many other measures paint a clear recessionary picture. Even corporate earnings — which in theory help dictate the prices of shares on the market — suffered their worst quarter since 2008. And yet stock indices continue to rebound much faster than the rest of the economy.
Why? As is usually the case in economics, it’s complicated — and everyone has a pet theory. A few include the idea that investors are betting on a quick “V-shaped” recovery (rather than the longer, slower “swoosh” shape many economists have predicted) and banking on corporate profits eventually rebounding in the medium and long run. Certainly the Federal Reserve’s actions have made it clear this is a priority.