Stocks Are Not The Economy
The economic/financial world is divided into two main camps. One side believes that the U.S. and global economies are teetering on the verge of recession, if we aren’t already in one, and the other side sees smooth sailing for as far as the eye can see, at least for the U.S. economy. Which side is right?
Those on the side of nothing but sunny skies for the U.S. economy point to a rip roaring stock market as proof the U.S. economy is killing it. How could we be making new highs in stocks if the economy isn’t good, they argue?
As we can clearly see on this chart of the S&P 500, stocks have exploded higher eclipsing the index’s late 2021 high:
Source: https://finance.yahoo.com/
The NASDAQ has experienced almost identical results, but is still a smidge below its all-time highs:
Source: https://finance.yahoo.com/
It’s critical to realize that the explosive returns in the NASDAQ and S&P 500 have been driven by literally a handful of stocks. Pull those 7 stocks out of the equation, and those indexes look entirely different. But we’ll set that aside for now.
Based on these two charts above, should we then conclude that the economy is on solid footing and recession is off the table? Before we concede to the no recession camp, let’s expand our views to consider some other countries to see how their stock markets are faring compared to their economies.
First up, we have Japan which has battled deflation since the early 1990s and is finally seeing it’s stock market make a run at new all-time highs after 33 years. Japan is currently in a recession.
Source: https://www.investing.com/
We also have Germany which is the economic stalwart of the Eurozone. Germany’s stock index, the DAX, is also at all-time highs.
Source: https://www.investing.com/
Germany’s economy shrank by 0.3% in 2023, but we’re told that it is not in recession. Not sure how it can shrink for the year and not be in recession, but nevertheless, is a shrinking economy a healthy economy?
So, we have two of the world’s biggest economies in recession or close to recession, and China, which committed economic suicide via its COVID policies, is experiencing outright deflation.
None of this guarantees that the U.S. will fall into recession, or worse, but don’t mistake a booming stock market for economic health. Stocks are not leading indicators for recession, they usually sell off hard only after the damage has occurred. Using stocks as a gauge for economic health is like driving down the road looking through the rear view mirror.
The stock market may continue its upward trajectory for a while, but be prepared for the ground to fall out beneath the stock market. Remember, it took about 15 years for U.S. stocks to climb out of the crater after the dotcom meltdown, and that’s on a nominal basis. How long can you wait to recover your losses?