Is the Stock Market Ignoring Economic Data?

The Stock Market is Ignoring Economic Data was the headline of a Wall Street Journal article last week (April 17).

Here is the first paragraph of the article, “The Dow Jones Industrial Average staged its best two-week performance since the 1930s, a dramatic rebound that has left many investors with a confounding reality: soaring share prices and a floundering economy.”

This is the kind of journalism that drives me nuts and of course supplies me with nice topics to vent about. There are several points to be made about this paragraph.

First, it uses the words “soaring share prices.” Even the graph in the article is highly misleading. It never explains that the soaring prices are from an incredibly low starting point. No duh. The market declined a lot. My numbers show that the S&P 500 average declined about 30% from February 19 to March 16. Hmmm…no mention of that. Just soaring prices. 

It's like noting that your mother gained 10 pounds this week while failing to disclose that she lost 50 pounds the week before.

Second, in a similar vein, it says the S&P staged its best two-week performance since the 1930s. But folks, even after this “huge” increase, the S&P value remained at around 2800. That still puts it well below the high in February of 3390. My calculator says the S&P value was still about 20% below its value in February 2020.

It’s like saying that little Jimmy’s grades went up a whole bunch but failing to note that he still has a D average.

Third, the article implies that there is something strange or wrong about a stock market that rises as the economy is floundering. I think I covered that point in a recent post. 

The stock market says little about the strength of the economy today. Its value mostly registers expectations about the future. So, there is no story about contemporaneous changes in the S&P and the economy.

What’s left to say, therefore, concerns expectations about the future economy. And with regard to that I would venture a guess that however floundering the economy is right now, its performance in the coming year will likely be much worse. Did I say much worse? Yes.

Is the stock market today fully absorbing a very dismal future economy? I doubt it. Given the low values of the S&P today, it seems to have at least partially digested a very crappy future economy.

Do investors today fully appreciate the depth and duration of the coming recession? I doubt it. While the S&P values are not soaring, they clearly might still be too high given the reality of the future recession.

I am guessing that stock values will continue to fluctuate a lot – and perhaps around a very slight downward trend as we come to realize just how stubborn this recession is going to be.

And with that stock market prediction, I will end this magnificent post by reminding you what Sonny Davidson said to me more than once, “If you are so smart, Larry, then why ain’t you rich?”