Why Markets Don’t Seem to Care If the Economy Stinks
So many of the most battered industries don’t matter much because of the way stock indexes are structured.
Bloomberg, August 4, 2020
Why do so many investors believe the stock market has decoupled from reality?
The economy we each experience – local, personal and (for the most part) not publicly traded – has been awful. To explain why these subjective experiences are not weighing down equity markets, we must look more closely into the intersection between the weakest industry sectors in 2020 and their impact on equity markets.
The surprising conclusion: The most visible and economically significant market sectors are also among the smallest weight by market capitalization. Markets are not especially affected by highly visible but relatively tiny sectors. The 30 most economically damaged sub-sectors could be de-listed before tomorrow’s open, and it would hardly shave more than a few percentage points off the S&P 500 index.
This despite the worst America economy since the Great Depression (if not ever). It is an “Off the Charts” economy, with data series like Gross Domestic Product, Unemployment Rate, Initial Jobless Claims so bad they must be re-scaled to even fit on charts. There has never been an economic contraction of the depth and speed of 2020’s in American history.
But the economy is not the stock market and vice-versa.
See full column here.