September 27, 2023
Why is the stock market ignoring the slowing economy?

It’s well documented – the stock market is ignoring the possibility of a recession. History shows that the benefits can keep coming.

The S&P 500 is up about 17% so far this year to about 4500, while the ISM Composite Purchasing Managers’ Index, a measure of economic activity, was down about 1% in the first half of this year compared with the same period last year. , Recently, the PMI has increased, but only by around 1%.

Higher interest rates, created by the Federal Reserve in an effort to reduce economic demand and inflation, are beginning to cool the economy.

According to Morgan Stanley, most of the time, markets and PMI data move together. If they were doing that now, the S&P 500 would be closer to 4000, about 12% below its current level.

It is not necessary that this happens.

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Historically, there have been times when the market became disconnected from economic data. Since the end of 2015, however, for most of 2016, the S&P 500 has increased by about 5%, while the PMI started 2016 lower than a year earlier. Then, From the midpoint of 2016 to a record high before the pandemic in early 2020, the S&P 500 rose more than 60%. The PMI remained above 50 for most of that time, indicating an expansion mode.

In the first half of 2017, the S&P 500 rose while the PMI declined and then the stock index rose 39% to its pre-COVID high.

As the economy continued to grow, the market experienced brief periods of economic weakness. Real GDP growth remained in the low single digits in percentage terms for most years between 2016 and 2020. Due to this lockdown, the global economy was shut down and ultimately recession occurred.

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That dynamic is happening today. The market currently sees that a Fed-induced recession has not yet arrived. There may be a mild event, but even before that happens, the Fed will stop raising rates as the inflation rate declines, a chain of events that will allow economic growth to stabilize soon. This is especially true as analysts expect demand to grow next year for housing-related industries and consumer electronics, which declined in 2023, while demand for travel and leisure is also expected to increase.

Here’s why market gains aren’t really so shocking – and why they may continue.

Write to Jacob Sonenshine at [email protected]


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