The Stock Market and Economy are Totally Disconnected
At least that's what this scatter plot shows
|Luke Makai||May 21|| 5|
At the end of March, I wrote about the common investor phrase that “the stock market is not the economy.” However, in that post, the scatter plot showed a messy but somewhat existent relationship between the two.
Well, just like everything else these days, that chart has been thrown out of wack due to COVID-19:
I highlighted two points here. The first is 2020Q1, which is comfortably within the pack of observations. The second is the current estimate for 2020Q2, which uses the latest estimate from GDPNow and is subject to change as the official release isn’t until the end of July.
While the first quarter of this year was bad, it has nothing on the second quarter. The drop in GDP is expected to be worse than anything on record.
Yet, the stock market is up. This is odd because very few quarters of data even have that stock-up-GDP-down directionality. Granted, GDP rarely falls to begin with but when it does the data is usually in the lower-left quadrant because it occurs alongside stock market declines.
So, for anyone feeling weird about the stock market and economy moving in opposite directions, this is some evidence that it is indeed unusual. For me, the data at least helps me put things into historical context.
To be completely honest though, this whole situation is incredibly strange and difficult to mentally reconcile. But I suppose, at the end of the day, that’s what unprecedented situations are all about.