The market is often viewed as a rational indicator of the economy now, and of its future. The stock market has performed far better than usual since Covid, mostly because corporate America has enjoyed huge profits. Meanwhile, the economy has struggled to grow, widening the gap between rich and poor. If you looked only at the market, you would hardly know anything was amiss. The correlation between average annual changes in nominal GDP and annual returns for the S&P 500, including dividends, was 0.11 from 1930 to 2019, and the correlation over rolling 10-year periods was 0.04. In other words, there was no correlation. (A correlation of 1 implies that two variables move perfectly in the same direction, whereas a correlation of negative 1 implies that two variables move perfectly in the opposite direction.) Economists and financial pundits need to be more careful about using the market as a proxy for the economy, and push back when Washington does it. But perhaps the best way is to just say it plainly: The stock market doesn't care about the economy, or you.
The stock market is not the economy.
"The stock market is a market where stocks, a type of investment that represents ownership in a company are traded," said Jessica Schieder, a federal tax policy fellow at the Institute on Taxation and Economic Policy.
"The stock market is where people make bets on what's going to happen in the economy."
First, you've got stock markets. They're the places where shares trade, like the New York Stock Exchange. Then you've got stock indexes, like the Dow Jones Industrial Average or the S&P 500. These are curated lists of companies that represent particular slices of those markets.
Now let's look at the economy. The economy is a sum of goods and services, all of the things we produce. Who produces these things that make up the economy? All of us; every wage level, every industry, every profession. Unlike the stock market.
"The richest Americans hold the lion's share of the value in the stock market despite the fact that about half of households own some stock," said Schieder.
"That means that the stock market and stock prices can be disproportionately influenced by a much smaller subset of the population and disproportionately influenced by the fortunes and alternative investment options of that smaller slice."
If the markets are disproportionately influenced by that smaller subset then, by definition, something bigger is having disproportionately less influence, as well.
"Another way in which the stock market and the economy are not synonymous is that you can have, you know, workers' wages really stagnating or growing only marginally as compared to the increases that we've seen in the stock market," said Schieder.
All of which means that there can be economic gains that are not accruing to the typical worker. So the stock market is not the economy. But the stock market is economy-adjacent.
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