The Stock Market Is Not The Economy

Stocks added to the gains of the prior week, bringing the two-week move to +16.6% in the S&P 500. As the economic data gets worse, traders get more aggressive in buying stocks. We are hearing lots of commentary about how serious the COVID-19 economic slowdown will be. The IMF’s economists released a report this past week predicting a -6% contraction in global GDP, the worst recession since the Great Depression, and worse than the Financial Crisis. The IMF’s chief economist explains this dire outlook in this video. In the U.S., the macroeconomic data is coming in much worse than forecast. This past week March retail sales plunged -8.7%; Empire Manufacturing for New York and Philly Fed Manufacturing Index showed record plunges; jobless claims increased another 5.25 million this past week, bringing the jobless claims total to over 20 million over the past few weeks; and the Leading Economic Index, a reliable indicator of economic activity, fell -6.7% just in the month of March.

With essentially no positive economic data or outlooks, the stock market rebound has been predicated on hopes for coronavirus containment and Fed/Treasury stimulus. We can add technical factors, as markets were extremely oversold in March. In other words, the rebound in stocks is purely speculative. In our April 3 Commentary, Alphabet Soup, we explained the different forms the economic recovery could take. Today, we look at the question of whether the shape of the economic recovery will reflect the recovery in the stock market.

Historically, the stock market has tended to peak prior to the onset of a recession, and trough before the end of a recession. Timing a stock market cycle based on the economic cycle has been rather unreliable, even if long-term bull markets do tend to correlate with economic expansions. What worries us today is that the stock market drivers have changed, and economic activity will be even more unreliable going forward. It should not come as a surprise that the main driver of the stock market has been central bank policy (willingness to provide unlimited liquidity to financial markets sine the Financial Crisis) and a secondary driver has been corporate share buybacks.

Already, the current bear market in stocks has distinguished itself from prior episodes in that the lead time versus the peak in economic activity was essentially zero.

With these caveats, we present below the traditional lead/lag times of the S&P 500 versus peak/troughs in U.S. economic activity.

The first table shows the lead times for the S&P 500 prior to the economic expansion peak. GDP is measured quarterly by the U.S. Bureau of Economic Analysis. We looked at the monthly peaks/troughs in the S&P 500. As we cannot pinpoint the historical month GDP peaked or bottomed, we take the final month of each GDP quarter to calculate the lead/lad times.

Expansion peak

S&P 500 peak

Lead time (months)

Q4 1948

June 1948


Q2 1953

January 1953


Q3 1957

July 1956


Q1 1960

July 1959


Q3 1969

November 1968


Q4 1973

December 1972


Q1 1980

January 1980


Q3 1981

November 1980


Q3 1990

May 1990


Q2 2001

August 2000


Q4 2007

October 2007


Q1 2020

February 2020



+7.16 months

Source: FRED

In the next table, we look at the lead (+) or lag (-) times of the S&P 500 versus the recession low point.

Recession trough

S&P 500 trough

Lead/lag time (months)

Q2 1949

June 1949


Q1 1954

August 1953


Q1 1958

December 1957


Q4 1960

October 1960


Q4 1970

June 1970


Q1 1975

September 1974


Q3 1980

March 1980


Q1 1982

July 1982


Q1 1990

October 1990


Q3 2001

February 2003


Q2 2009

March 2009



-0.6 months

Source: FRED

We used the monthly Industrial Production data versus the monthly S&P 500 peak/troughs and got similar lead/lag times (not shown).

Our results show that the stock market is clearly not the economy. The peaks/troughs in GDP have not historically lined up with S&P 500 peaks/troughs, in addition to showing wide divergences. In 1982, 1990, and 2003, the stock market troughed after economic activity bottomed. Even knowing if the economic recovery will take a V, U, L or W shape may not be sufficient to successfully time the bottom in the S&P 500 this time around. As mentioned, the current relationship between the stock market and economic activity has the added dynamic of unprecedented central bank and government monetary/fiscal stimulus. Our message today is that trying to read the tea leaves by following the economy will prove to be an even greater pitfall than in the past. That said, it would seem to us today that the only way for the March 23 lows on the S&P 500 to be the absolute low is for the coronavirus to go away quickly and the economy to rebound in a V-shaped manner. At WMA, we have re-focused our portfolios to rely almost exclusively on technical analysis. With the lack of visibility provided by this explosive cocktail of economic shutdown, monetary/fiscal stimulus, massive indebtment around the world, and the likely lingering fear over coronavirus by consumers, no one should have a dogmatic opinion on the trajectory of the S&P 500 path based on economic forecasts.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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