Stocks are the Economy

“Stocks are not the economy” is something you may have heard while US indices were charging to new highs only months after a market crash.  There is of course some truth in that since the stock market doesn’t capture your trip to the local bakery.  However, when it implies that stock markets are separated from economic reality it is not true. 

Markets were led by the companies that were going to benefit the most from the lockdowns and its effects on our everyday lives.  The hardest hit sectors like travel and hospitality were sold off and have not yet recovered and may not recover for a long time.  Investors look at what is happening in the economy but more importantly look at what the future economy will look like.  When the pandemic is behind us and the future looks brighter for the hardest hit sectors, they will rise again and be favored by investors. 

Of course this doesn’t deny the fact that some sectors may be overbought like we saw over the summer.  At some point if investors think the price is too expensive for future returns then these stocks will be sold off as well.  This is the reason why equity investors are said to be forward looking and use the present to determine what lies ahead.