With the S&P 500 up 43% from its March 23 year-to-date low and closing in on its prior peak, one theme seems to be dominating financial commentary this week: the apparent disconnect between soaring stocks and plunging economic data.[i] Some of it struck us as rational, pointing out that it is normal for stocks to appear cold in the face of civil unrest and improve before the economy does. But the vast majority of it presumed the market must be incorrect, driven by too-high hopes and Fed policy, with a reversion in store once investors come to grips with just how bad things are. We acknowledge the possibility, but we also think it is worth pointing out that this is how bull markets normally begin. Stocks are a leading indicator. They move on the gap between expectations and reality over the next 3 – 30 months or so, not the next 3 – 30 days. To show this, we thought it would help to take a trip down memory lane to see what things looked like in the weeks and months after March 9, 2009, the day the last bear market reached its ultimate low and a new bull market began.
Let us start with the headlines, which looked an awful lot like they do today. Here is just a smattering, starting with one of the biggest stories on the day stocks bottomed out:
There are many, many more where those came from, but you get the drift.
We aren’t picking on the headline writers who came up with these or the actual reports themselves. Some of them were flat-out accurate for the conditions they were seeing at the very moment they were written. To anyone taking even a cursory glance at economic data and corporate earnings releases during this stretch, stocks probably did indeed look insanely disconnected from the facts on the ground. Exhibits 1 – 3 show the S&P 500 Price Index alongside earnings, GDP and major monthly economic data in 2009. As you look at them, bear in mind that the relevant data reports came out weeks after the period in question ended, making stocks look even more out of touch than the charts would suggest.
Exhibit 1: Stocks and Earnings Growth in 2009
Source: FactSet, as of 6/9/2020. S&P 500 Price Index level, 12/31/2008 – 12/31/2009, and S&P 500 earnings growth, year-over-year, Q1 2009 – Q4 2009.
Exhibit 2: Stocks and Monthly Economic Data in 2009
Source: FactSet, as of 6/9/2020. S&P 500 Price Index level, 12/31/2008 – 12/31/2009, and Retail Sales and Industrial Production growth, month-over-month, January 2009 – December 2009.
Exhibit 3: Stocks and GDP Growth in 2009
Source: FactSet, as of 6/9/2020. S&P 500 Price Index level, 12/31/2008 – 12/31/2009, and US GDP growth, seasonally adjusted annualized rate, Q1 2009 – Q4 2009.
The issue here is that most headlines and economic data are either a reflection of now, or the recent past. Yet markets look forward. They discount expectations, opinions and headlines. Early on, negativity becomes the basic bricks in the new bull market’s wall of worry. In 2009, it would be months before some pundits’ pessimistic disbelief in the rally gave way to a begrudging half-acceptance. For others it took years, with stocks climbing higher in fits and starts as negative headlines poured in.
So yes, there is a disconnect between economic data and stocks. But it doesn’t mean markets are irrational or pumped up by stimulus or have ceased to function in their normal role. It means they are doing what they have always done: Anticipating future conditions after weighing the worries that headlines and data convey. You should expect that to continue for a long time from here, regardless of where markets head in the near term.
[i] Source: FactSet, as of 6/9/2020. S&P 500 price return, 3/23/2020 – 6/9/2020.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.