The Stock Market and the Economy are Related, but not the Same
/The stock market had a rough 2022 with the S&P 500 losing close to 20%. While the stock market and the economy are related and often discussed together, they are not the same thing.
The Stock Market versus The Economy
A stock market is an exchange where participants can buy and sell shares of public companies. Markets are forward-looking - shares are valued based on how they are expected to perform in the future.
The economy is everything related to the production, consumption, and trade of goods and services. To measure the health of the economy, we look at unemployment claims, inflation, new home construction, gross domestic product (GDP), etc. Economic data is backward-looking - the newly released numbers tell us what happened during a previous time period.
When are we in a recession?
One of my favorite podcasts is NPR’s ‘Planet Money’ and I love this episode where they talk to a past committee member of the National Bureau of Economic Research (NBER), which is the organization that defines business cycles. Most of us know the definition of a recession as 2 consecutive quarters of declining GDP, but in reality, the NBER makes the official call and they take more of a holistic view. They look at GDP but also a variety of other economic factors to make the determination.
How the stock market behaves during a recession.
The stock market typically has negative returns at the beginning of a recession and recovers months before it is over. According to this Forbes article: “In almost every case, the S&P 500 has bottomed out roughly four months before the end of a recession.”
For a visual, this chart shows the S&P 500’s relationship with Bear Markets and it is apparent that yes, the forward-looking stock market tends to recover before the bear market is complete.
What should an investor do when the risk of a recession rises?
There is talk of a recession in the coming months. Whether that comes to fruition or not, the plan is the same.
Stick with your investment strategy and don’t try and time the market regardless of what is going on with the stock market or the economy.
If you are still working, confirm that you have an adequate emergency fund in a high-yield, liquid account in the event you lose your job or face reduced income.
Consider meeting with a financial planner to get a solid financial and investment strategy in place.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.