The Market is not the Economy

Often when the stock market seems divorced from the real world, someone will spout the cliché “the market is not the economy.” It’s a soundbite-worthy phrase that is vague enough to cover a multitude of scenarios. What, though, has made the market so different from the economy in 2020?

For starters, you need to define the market. Generally, the S&P 500 Index is used as a proxy for the stock market. The index is made up of the 500 largest publicly traded US companies. The S&P 500 is top-heavy with Apple, Microsoft, Amazon, Facebook, and Google making up nearly 25% of the index.

Those five companies, based on their structure, were well positioned for the challenges of 2020. Except for Google, all have performed very well this year. Those five companies combined to grow revenue by 18.74% from the second quarter of 2019 to the second quarter of 2020. That’s a difference of nearly $37.4 billion in sales in one year’s time.

The economy as a whole is not doing as well. Unemployment, while better than in the spring, is still at historically high levels. Across the US, government restrictions and consumer concerns are hampering businesses like restaurants, bars, hotels, tourism, transportation, retail, and entertainment.

Often, companies in these categories are not publicly traded and therefore not part of the stock market. Generally speaking, you cannot buy shares in your favorite neighborhood restaurant or ice cream parlor. While companies in those categories accounted for about 19% of US GDP and 20% of jobs before the pandemic hit the US, they only made up about 7% of the total earnings in the S&P 500.

There are, as always, winners and losers. Companies winning in the economy have by and large seen substantial increases in market value. Conversely, companies struggling economically have mostly dropped in market value. It just so happens that the winners were the biggest companies before the pandemic, so the big have gotten bigger in the market and fundamentally.

One thing is for sure, while the S&P 500 is up year-to-date, for many people 2020 hasn’t felt positive thus far.

Photo by Victor Xok on Unsplash