It’s a question that has left even the most seasoned investors scratching their heads: Why does the stock market seem to be thriving while the economic news looks grim? If you’ve ever felt this confusion, you’re not alone. The disconnect between markets and the economy is one of the most puzzling—and important—topics in investing.
Let’s unpack this phenomenon, look at what history teaches us, and explore what it means for your portfolio.
Markets Look Ahead, Not Back
The economy, with its GDP reports, unemployment rates, and inflation numbers, is all about the here and now. It’s a snapshot of how businesses and consumers are doing today.
The stock market, however, is a different beast. It's a forward-looking machine, constantly trying to predict the future. Investors aren't focused on what’s already happened; they’re placing bets on what they believe will happen next. Will corporate profits rise? Will interest rates fall? Will a new government policy boost consumer spending?
This is why markets often start to move well before the economy shows any signs of improvement or decline. Think of it like this: the economy is driving a car looking at the rearview mirror, but the market is looking through the windshield.
A Perfect Example: The 2020 Rebound
In the spring of 2020, the U.S. economy was in freefall. Unemployment soared to 14.7%, and GDP collapsed. By all accounts, the economic picture was bleak. Yet, the S&P 500 rebounded more than 20% in the first half of the year. Investors weren't celebrating the current conditions; they were anticipating that unprecedented government stimulus and central bank action would eventually turn things around.
History Repeats Itself
This isn’t just a recent trend. The pattern of markets "running ahead" of the economy has played out time and again.
The 1982 Recession: Even as inflation and unemployment were at painful highs, the market began to surge months before the economy showed any improvement. Why? Interest rates were starting to fall, and investors saw a light at the end of the tunnel.
The 2009 Financial Crisis: While the recession was still in full swing, the S&P 500 began a powerful rally in March 2009, anticipating the slow but steady recovery to come.
Canada in 2013: The TSX climbed despite sluggish GDP growth and high unemployment. In this case, global commodity trends, not local economic data, were driving the rally, showing how markets are often influenced by bigger, international forces.
In each of these scenarios, markets didn't wait for good news; they were already pricing in what they believed was on the horizon.
Markets Aren’t Crystal Balls
It's crucial to remember that markets aren't perfect predictors. Sometimes they get it wrong or their timing is off. For example, looking back at the 11 U.S. recessions since 1953, markets only "predicted" a recession eight times with a bear market (a 20%+ drop). And even then, the timing wasn't always perfect. The market sometimes falls months before the recession, but other times, the drop happens at the same time as the downturn.
This tells us two important things: Markets can be useful signals, but they can also be misleading. Don’t ever assume the market has a perfect view of the future.
Why Indexes Don't Mirror the Economy
Another reason for the disconnect is that a stock market index, like the S&P 500 or the TSX, isn't a perfect representation of the entire economy.
In Canada, the TSX is heavily weighted toward energy and materials. These sectors can swing the entire index, even if they aren't big job creators or major drivers of overall GDP.
In the U.S., technology and communications companies make up over 40% of the S&P 500. This means that a handful of tech giants can lift the entire market, even if other sectors are struggling.
So, when an index rises or falls, it’s often a reflection of a few big sectors, not a snapshot of the economy as a whole.
What This Means for You
For investors, the main takeaway is simple: Don't expect markets and the economy to move in lockstep.
Avoid overreacting to headlines. By the time you read about a struggling economy, the market may have already priced in that information.
Don't rely too heavily on forecasts. Economists and analysts often disagree, and the market doesn’t always follow the script.
Diversify. If a single index is dominated by a few sectors, a well-balanced portfolio across different industries and geographies can protect you from big swings.
Think long-term. The disconnects we’ve discussed tend to smooth out over years, not weeks. The most successful investors focus on their long-term goals and stay the course.
The Takeaway
It’s normal—and expected—for markets and the economy to move on different timelines. The relationship between markets and the economy is complex, and they don't move in a predictable way
The real advantage of smart investing isn’t about trying to guess what the market will do next. It’s about having a disciplined, diversified strategy that isn't swayed by every headline or market move. That's how you stay in control and let time do the heavy lifting for you.
Our role is to help you focus on what you can control: staying invested, staying diversified, and aligning your portfolio with your goals.
This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. All investments involve risk, including the potential loss of principal. Leveraged ETFs and other complex investment vehicles may not be suitable for all investors and should only be used with a full understanding of their risks. Asset class performance varies over time, and diversification does not ensure a profit or protect against a loss. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. Mutual funds and other securities are offered through De Thomas Wealth Management, a mutual fund dealer registered in each province in which it conducts business and a member of the Canadian Investment Regulatory Organization (CIRO).