In a recent article on Charles Schwab, Managing Director Liz Ann Sonders discusses what she describes as the “nuanced relationship between the stock market and the COVID-19 economy.”
Here are some key takeaways:
- Because stocks tend to lead the economy, economic data is “typically lagging,” so bear markets typically begin and end before recessions begin and end.
- “When comparing the appreciation in stocks to the appreciation of gross domestic product (GDP), we are indeed at extremes in terms of ‘disconnect,’” Sonder writes, adding that the ratio of the two (often called the “Buffett Indicator”) is at its highest level since 2000. But Sonders notes that the anticipated rise in GDP this year could bring down the ratio.
- Sonders tracks the market’s performance over the past year as follows:
- From the beginning of 2020 through September, performance was heavily biased toward the “big 5” stocks—the largest by market capitalization (a group which currently includes Apple, Microsoft, Amazon, Google (Alphabet) and Facebook).
- Since September 2020, that group has “taken a breather,” Sonders notes, which reflects the “broadening out in economic growth” and the reopening of the economy.
- In November, those stocks considered the “COVID losers” began catching up as the vaccine rollout progressed.
“In sum,” Sonders explains, “looking under the hood of the stock market’s behavior over the past year shows a bit more of a connection than is generally perceived.” She adds, however, that as the market tends to anticipate economic strength, it also anticipates when that strength is peaking. She advises that we watch this carefully as the year progresses, “given that (for now) the final and most recent round of fiscal aid is behind us and we may be approaching peak growth rates in some economic data.” While it doesn’t necessarily suggest that the expansion is ending,” Sonders argues that it “does tend to bring on a higher level of market volatility.”