The continuing strength of the stock market even as the coronavirus pandemic batters the U.S. economy has baffled many observers. The Dow Jones Industrial Index fell some 30% in the first three weeks of March as COVID-19 began spreading rapidly globally, but it has since gained nearly 60% to current levels above 28,650. Meanwhile, the U.S. economy shrank 31.7% in the April-June quarter, the Commerce Department reported last Thursday.
During a recent segment of the Wharton Business Daily radio show on SiriusXM, Wharton finance professor Itay Goldstein identified three factors that explain the apparent disconnect between the stock market and the economy. (Listen to the podcast above.)
Fast Forward, and a Fed Push
The first, which is true of all times, is that “the stock market is meant to be forward-looking,” Goldstein said. “In general, the stock market is a bit different from the economy, in the sense that what you see right now in the economy is what is going on right now” such as production, employment and so forth, he noted. Even in “normal times,” stock prices and economic output would not move in tandem, according to Goldstein. In fact, we may have situations “where the stock prices may predict something that is going to be different from what we see right now.”
Secondly, the Federal Reserve has “put a lot of money into the market, and that certainly helps keep prices up, maybe above what we would expect without this intervention,” said Goldstein.