The stock market and the economy are not one in the same. When we talk about the market, we are usually talking about some index such as the Dow Jones Industrial Average or the S&P 500. When discussing the economy, factors like unemployment numbers, the rate of inflation, and GDP (Gross Domestic Product) growth are typically the main points of discussion. So why are the two so often confused for one another?
Often, we hear reports stating that “the market drops on increasing fears of a recession” or “the market moves on anticipation of better unemployment numbers”. In both examples and in most reports you hear the market is moving in what it expects the economy to do and later corrects when the actual data is released. That is why the stock market is a key leading indicator for the economy because although they differ in key ways, moves in the market often correlate to future moves in the economy.
This is exactly what we saw play out in the first half of 2022. According to St. Louis Fed data, the S&P 500 index was down 20.58%, and the Dow Jones Industrial Average was down 15.31% in the first half of 2022. Following this, we got news of negative Real GDP growth in the first two quarters of 2022, as the leading indicator would have suggested.
Since that point, the market has made a modest recovery, and economic conditions have started to follow. However, the constant talking point on TV has been the looming threat of a larger recession. This is an outcome that the market has had to price in, and is likely why we continue to see the market lower than where we were a year ago. So, when you see someone on the screen giving their thoughts about a possible recession, it is very likely the market has already given its thoughts on that possibility long before that person had a chance to speak.