MAIN STREET AND WALL STREET DISCONNECT
should translate into higher stock market returns. An (highly simplified) equation for it might go something like this: Faster economic growth ➞ More demand for companies’ services and products ➞ growth in corporate earnings ➞ share price appreciation. And it follows that the converse (lower economic growth should result in lower share prices) would also be true. In May, the Economist agreed... “Financial markets have got out of whack with the economy. Something has to give.” And let’s not forget... that was all last year, when the S&P 500 was well below where it is now... global coronavirus deaths were a fraction of what they are now... and conventional wisdom was that by the autumn of 2020 – that is, nearly half a year ago – we’d be hugging and passing hotdogs down the row at ballgames and jostling each other in the subway like the old days. (And that was before America was on fire over the summer in the worst racial unrest in half a century... and before an armed mob took over the U.S. Capitol in the most serious assault on American democracy ever.) The thing is, that dichotomy between the stock market and the economy is not unreasonable. It’s not wacky and ridiculous. And it shouldn’t be surprising at all. However... The why – the real why – isn’t what you’d expect. There are plenty of obvious explanations of
Watching the news, you’d think the Great Disconnect was as contradictory as “government intelligence”... as impossible as a Sudoku crossword... as terrible a crime against humanity as ketchup on filet mignon... and as unjust – regular folks suffer as Wall Street fat cats loosen their belts yet another notch! – as a rainy day at the beach. It’s as if the market should know better, but still stubbornly refuses to bend to, you know, sanity and justice... and continues to hit new all-time highs, instead of crashing and burning like the economy. “Investors baffled by soaring stocks in ‘monster’ depression,” the Financial Times in April. “The economy is in free fall. So why isn’t the stock market?” asked Vox in May. “The gap between markets and economic data has never been larger,” moaned Citigroup in a research note in April. “Why Doesn’t the Stock Market Care About All the Bad News?” Money magazine demanded indignantly a few weeks ago. And, on the surface, it does seem as weird and wrong as sandals with socks. To many people, it feels self-evident – the sky is blue, politicians lie – that higher economic growth
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February 2021
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