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Stock markets are forward-looking, and often lead economic data by several months. This insight may explain the recent surge in stocks.

5.20.20 Equities vs. economy chart

Much of the global economy virtually shut down in recent months, the domestic economy has started to see some of the worst economic data in decades, with record-high jobless claims, an unemployment rate near 15%, and GDP contracting by nearly 5% in the first quarter. Economists forecast that the pace of contraction during the current quarter will be much worse. Despite the bad economic news, equities have seen a significant rebound since the March 23 low. The result? The best monthly performance in April in more than 30 years, and the fastest 20% increase in the S&P 500 in history.

How can stocks be rebounding while economic data is not only poor, but getting worse? While there is a correlation between the economic cycle and the market cycle, it’s important to note that the economy is different than the stock market, and the two rarely move in lockstep.

As illustrated in the chart above, stocks typically lead economic data by several months. Historically, the stock market has peaked about seven months prior to an economic downturn. Similarly, stocks have also tended to rally well before the economy troughs. More volatility is certainly possible, but the surge in stocks since late March indicates that investors are looking through the negative news to expect brighter days ahead. 

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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