Until its recent 2% dip, the stock market has been unusually high. Unusual in that stock prices for major and mid-sized companies have become super inflated in the wake of the COVID-19 pandemic, all while the economy is effectively in a recession. Businesses have either cut back on major functions, downsized on staff, or have closed altogether. Unemployment at one point was over 10% and only now lowered to around 8%, which is unheard of outside of economic depressions. According to the Bureau of Economic Analysis, the US GDP dropped by 32.9%. So how in the world did the Dow Jones and S&P break records in August?
Breaking its already high February record, the S&P 500 rose 0.2% to 3,389.78, the highest closing level in recent history, something Trump and other politicians took credit for. This came in the midst of quarantine when restrictions were at their very worst. Almost as if they were divorced from economic reality at the time. That is because they were.
Many make the mistake of believing the stock market can be a good indicator of economic like unemployment or GDP; however, the DOW Jones and S&P are more of a prediction index. When investors expect or hope for good economic performance in the future, stock prices go up. That does not mean to imply that they are always right and infallible. Before the Great Depression, the stock market was at its peak, 381.17, this being a very high score at the time. That peak would only precede the most dramatic drop in United States history, proving once and or all that a stock index could never be trusted.
Therefore the next time you read a report that includes it in a diagnosis of the Economy’s health, just toss it.
