The Stock Market Does Not Mirror Economy

The Markets had a bad week last week as the S&P backtracked -2.9%. Corona Virus cases are spiking, leading several states to halt the opening up and in some cases even move backwards. The economy will undoubtedly take a hit. That said it may not affect the market all that much more for one main reason, the stock market is not a mirror of the economy.

The stock market is an auction market where dollars chase stocks based on our future expectations. All other things equal, the more dollars in the market (or the less stocks) the higher prices go. Stock prices are receiving an enormous lift thanks to the US Federal Reserve (and other central banks around the world). The Fed is increasing the price numerator by both drastically increasing the supply of dollars and also lowering interest rates so low that investors who are seeking even moderate returns have no choice but to put those dollars in the stock market. Any sign of stability will bring dollars flooding into the market.

Bad news will still bring the market down but even neutral news will send the prices higher (like today). The market wants to move up thanks the river of dollars pushing the numerator up. Eventually things will even out (maybe by the economy eventually coming up to the market) but don’t count on it anytime soon as we said last week “the market can stay irrational longer than you can stay solvent“ and the most power economic force in the world (the Federal Reserve) wants stocks prices to stay up. The Fed usually gets what it wants.

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