As states cautiously begin the process of relaxing their COVID-19 restrictions, some are wondering, “Why are the financial markets doing so well when the economy is doing so poorly?”
It’s a great question, and fortunately, one that's been answered before. To find the answer, we’ll need to dust off those economic textbooks of yesteryear and turn to the chapter on “lead, lag, and coincident indicators.”
“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.
In general, when trying to evaluate why the markets are behaving a certain way, it may be best to gather as much data as possible. Economic indicators can help provide context for what can often seem counterintuitive behavior, especially in the face of intense global disruption.
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
Market Behavior and the Economy
May 29, 2020