Barry Ritholtz: Why Markets Don’t Seem to Care If the Economy Stinks
The stock market has been on a tear, yet the economy is in the dumps. So why do so many people believe -- undoubtedly incorrectly -- that the stock market has decoupled from reality?
The economy many people experience, while bleak, is local, personal and, for the most part, either not publicly traded or plays only a small part in the stock market’s moves. To explain why these personal experiences have so little effect on equity markets, we must look more closely at the market role of the weakest industry sectors.
The surprising conclusion: The most visible and economically vulnerable industries are also among the smallest, based on their market-capitalization weight in major indexes such as the S&P 500. Markets, it turns out, are not especially vulnerable to highly visible but relatively tiny industries. The 30 most economically damaged industry categories could be de-listed before tomorrow’s market open, and it would hardly shave more than a few percentage points off the S&P 500.
This is so despite the worst U.S. economic collapse since the Great Depression. All of the economic data is so bad that figures on gross domestic product, unemployment and initial jobless claims must be re-scaled to even fit on charts.
But the U.S. economy is not the stock market and vice versa. As we discussed before, ignoring overseas strength is a major oversight. The so-called FAANGs (along with Microsoft) derive about half -- and in some cases even more -- of their revenue from abroad. Beyond that, the pandemic lockdown in the U.S. has benefitted the giant tech companies’ sales and profits. No wonder the Nasdaq Composite 100 Index, which is dominated by big tech companies, is up about 26% this year.