Why Is the Stock Market So High In a Bad Economy?

Why Is the Stock Market So High In a Bad Economy? For starters, the stock market isn’t our economy. These two financial measurement tools actually track different things.

The stock market tracks the valuations of companies that sell products to other companies and individuals. The economy, on the other hand, has an entire sector not captured in the stock market. Service oriented businesses, such as hairstylists or dentists, don’t register as publicly traded equity, but the sum total of these person-to-person transactions are a large part of our GDP.

As the coronavirus pandemic swept the nation and the world, these types of businesses, if not considered essential, had to close or scale back their offerings. Large scale corporations, however, continued business as usual in some cases – creating an upswing in the market in spite of the downturn in the economy.

But just how bad is it?

The Economy is God Awful

Mandated lockdowns meant non-essential people had to stay home. This left millions of people without jobs and small business owners with few options.

As most small businesses were deemed non-essential, many entrepreneurs and other business owners had to close up shop. Some filed for bankruptcy while their employees filed for unemployment.

This coupled with workers unable to work due to sickness or caring for a sick loved one meant even many essential positions faced personnel shortages, disrupting supply chains across the nation. Remember the toilet paper fiasco?

In June, over 18 million people were without employment. On August 6, 2020, almost 1.2 million more people filed their first-ever unemployment claim, illustrating that the pandemic’s rampage on personal finances, and the economy overall, is far from over.

People also are now worried about their retirement savings. Even with the promise that stock market appears to show, there’s still the potential for another overwhelming crash like earlier this year.

But right now, the stock market looks so good…

The Stock Market is Soaring

Seeing the stock market as “up” depends a little on where you look, but there are several stocks – especially those in the tech sector – that are soaring. Apple, Amazon, and Tesla are just a few of these tech stocks that show no signs of slowing down. So, what’s their secret?

Apple is up huge for 2020. Even though the tech giant hasn’t seen much growth, the company’s stock is up more than 50% for the year.

Amazon has seen over 70% growth from July 2019 to July 2020.

And Tesla has seen the biggest jump in the shortest amount of time – 50% just in the days since August 11, 2020 when the company announced their stock split.

But why on earth – when the world is experiencing such tumultuous times – are these stocks soaring?

Record-breaking stock surges during a recession?

Tech stocks are carrying the market thanks to the trillions of dollars of federal stimulus aid aimed at propping up the failing US economy.

Even though stocks are soaring, the average American isn’t out of the woods just yet. In just over 20 weeks, over 56 million workers found themselves without jobs.

That said, the labor market is showing subtle signs of improvement, helping rejuvenate optimism. While the economy isn’t near as well-off as it was pre-pandemic, the uptick in the stock market shows there’s hope.

By week’s end on August 8, the number of people seeking unemployment finally fell below one million, coming in at 963,000. It’s the first time since mandated shutdowns that this figure has been this low. However, at the peak of the housing bubble crisis of 2008 and 2009, today’s figures are still far higher than March 2009’s 665,000.

And, while new jobs have been created in the interim since the spring, layoffs are still astronomically high. Around 13 million jobs were lost with the shutdown. July’s unemployment rate was just over 10% – an historical high compared to February’s 3.5%, the lowest rate in 50 years.

Consumer spending is apparently on the rise, the housing market is rebounding, and corporate profits look better than first anticipated – all of which maintain investor optimism.

Fiscal Stimulus Has Reduced Pain

The loans the government have provided for businesses and the CARES Act stimulus money for individuals and families has helped ease the brunt of what otherwise would’ve been quite a painful last few months.

Governments and banks around the world funneled money into countries’ respective economies in an effort to ward off a global recession. In the US, this caused the Federal Reserve a deficit of nearly $7 trillion – and it looks like more stimulus might be on the way.

While this deficit might appear appalling at first, let’s examine this a bit closer.

Federal Reserve Stimulus

There are a lot of “relationships” in the financial field – one of these relationships is that between the Federal Reserve and the stock market.

Do you find it odd how the Federal Reserve’s balance sheet increases in conjunction with the stock market rising?

As the Federal Reserve prints more money, those holding bonds sell these somewhat safe positions to the Treasury – using the same cash printed by the Federal Reserve. They then take their proceeds and invest in riskier assets – the stock market – which causes the rise.

In other words, the economy is certainly not in good shape, but you can see from the above how the economy and the stock market are not the same thing.

Here’s another breakdown of the above:

On February 17, the stock market was declining. The Federal Reserve’s balance sheet showed $4.17 trillion. By March 23, as the stock market was tanking, the Reserve’s balance sheet rose to $5.25 trillion.

June 8 saw a peak of $7.17 trillion and by the end of the month a slip to $7.10 trillion. This illustrates the correlation that drove the market higher.

Why Is the Stock Market So High In a Bad Economy?

The economy paints a picture of the present, or current, financial situation, while the market illustrates the future.

According to the market, the future might not be so bleak as the economy would have you believe. Or at least it makes the future look just good enough that owning a few stocks appears more justified than owning other types of assets, such as real estate, bonds, or even cash.

This is the key to understanding how the markets and the economy are not the same thing but how they are indeed related.

The market will rise well before the recession is finished. Also, keep in mind – a recession is the period of time in which the economy declines. Even when an economy is still low, a recession can be considered over if the economy begins to grow again.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.