Reality and the stock market don’t always align. Don’t be fooled into thinking the economy is back on track | Greg Jericho

This week the Australian stock market ended a run of seven days of rises, a run that has happened only three times in the past two and half years. It was a nice example that the stock market does not reflect your reality.

The first thing to remember is that you would be hard-pressed to find a major economic measure that correlates with its performance.

From early 1992 through to about 2012 there was a semi-decent relationship with the annual growth of the ASX200 (the best indicator of the Australian stock market) and what would happen to nominal GDP growth nine months later, but since 2012 that relationship has completely broken down.

Movements in the stock market can be as much due to perception as reality. A company can announce a record profit but its share price can fall because investors were expecting a bigger profit.

They are also generally more responsive to the announcement of bad news than to ongoing bad news.

When the coronavirus hit, stock markets around the world sank as fast as they ever have. Both here and in the US, the market fell about 35% in less than a month.

That at least makes sense to people: the economy is about to shut down so you would expect the value of companies’ stocks to fall.

But over the past three months the Australian stock market has risen strongly and by Wednesday was back to where it was in February last year and only about 15% below the peak of February this year.

In the US things were even “better”. The S&P500 was down just 5% on the pre-virus peaks, and the technology based Nasdaq Index had not only recovered all the losses of February and March it was breaking records.

So the bad news is over? We’re back and fully functioning again?

Well, no.

While there may be some link with reality and the value of stocks, a large proportion of what we’re seeing is a reaction to things seemingly not being as bad as first thought, and also a wilful desire to pretend things are not as bad as they are.

In America more than 5,500 people are still dying each week, and 150,000 people each week are still being diagnosed with Covid-19. This week it recorded 2m cases – and half have occurred since the end of April.

The US Federal Reserve’s Weekly Economic Index, which takes into account 20 economic measures, remains at a point that suggests America’s GDP will fall 10% below what it was a year ago.

In Australia, news that things are opening up is certainly based on better health news, but the economy remains profoundly damaged.

This week the secretary of the Treasury told the Senate committee on Covid-19 that it has been “steadily revising down our expectations of how high the unemployment rate will rise, because of the fact that the health scenario has continued to improve”.

Treasury now expects the unemployment rate to peak around 8% rather than its previous estimate of 10%. And yet, as I noted last month, had 490,000 people not left the labour force entirely the unemployment rate in April would have hit 9.7%.

The underutilisation rate in April was 1.8 percentage points higher than the previous record set during the 1990s recession.

We remain in a state where large sections of our economy – especially the education and tourism sectors – face precarious futures given ructions with China. And we have a government desperate to wind back stimulus measures and declare victory.

But while reality and the stock market may at time stop conversing, the estrangement can only go on for so long. And thus on Thursday and Friday reality came over for a visit. In America the stock market fell 6%, the ASX 3% and then on Friday the ASX fell another 1.9%.

The stock market gets daily coverage and yes, our superannuation is greatly affected by it. But don’t get sucked into thinking its rises are signs of the economy returning to normal.

Greg Jericho writes on economics for Guardian Australia

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