Why is the stock market up during a recession?

Lately I have been asked variations of the following question - “Why is the stock market doing so well when the economy is doing so poorly?”

It’s a great question, and fortunately, one that's been answered before. I found some information that might give some insight. 

“Lead indicators” are factors that are used to anticipate what may happen 6-9 months in the future. Think of the stock market as the foremost lead indicator. Now, imagine that the stock prices today are anticipating where the economy will be in 6-9 months. Is it correct? Despite what some may claim, no one knows for sure.

Alternatively, “coincident indicators” attempt to show the state of the economy right now. For example, gasoline deliveries are currently trending higher, consumer confidence appears to have stabilized, and airlines are seeing more bookings. Even the supply of toilet paper seems less of a concern these days, with Google searches for TP falling to near-normal levels.^1,2 This may hint at higher consumer confidence at present.

Finally, “lag indicators” provide insight into past economic data. They may confirm long-term trends, but they are not very good at forecasting. The consumer price index is a historically classic example of a lag indicator. It tells us what inflation was, but doesn’t provide much insight about the future.

You will frequently hear me say I do not predict the stock market.  There are too many variables and it's easy to be incorrect.  A suitable investment allocation and long time horizon is my mantra.  The markets react to data as well as emotion.  Let's make sure you and I build a portfolio based on your goals and risk tolerance that should work for you over time and then we can let go of the aspects of the market that puzzle us and focus on the family we love, the work we enjoy, and the activities that will bless someone else.

Let me know if you’d like to chat about the economy or any other topics you’re pondering. I’m always here to help.

^{1. MarketWatch, May 20, 2020}

^{2. MarketWatch, May 20, 2020}