Is the Stock Market Socially Distancing Itself From the Economy?

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With the S&P 500 rising about 40% from its March 23rd low and NASDAQ closing above 10,000 for the first time today, is the stock market socially distancing itself from the economy with a 13.3% unemployment rate in May?

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Fed Forecasts A 6.5% Decline In Real GDP

The Federal Reserve today released its projections for 2020, 2021, 2022 and beyond.  These projections are very optimistic. Although they forecast a 6.5% decline in real GDP for 2020, the projections of 5.0% growth for 2021 and 3.5% growth for 2022 are consistent with a strong economy. Their longer run (beyond 2022) projection is for 1.8% growth.

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The current unemployment rate of 13.3% for May is projected to decline to 9.3% by the fourth quarter of 2020, and then to 6.5% in the fourth quarter of 2021 and 5.5% in the fourth quarter of 2022. These projected rates for 2021 and 2022 are very close to the average unemployment rate of 5.7% since 1948 and 6.2% over the past 50 years. Beyond 2022, the Federal Reserve projects an unemployment rate of 4.1%.  The unemployment rate of 3.5% in February was a 50 year low.

Furthermore, inflation is projected to be only 0.8% in 2020, 1.6% in 2021, and 1.7% in 2022.  It is then expected to equal 2.0% in the longer run.

The Federal Funds rate is projected to remain at 0.1% through at least 2022 and then rising to 2.5% in the longer run. Therefore, the Federal Reserve is not expecting to increase interest rates at least through the end of 2022.

The Stock Market Is Socially Distancing Itself From The Economy

The stock market is forward looking.  Its very strong performance since the March 23rd lows is consistent with the Federal Reserve’s forecasts of a recovering economy with healthy GDP growth, improving unemployment, and low inflation.

The stock market may be socially distancing itself from today's weak economy, but not with respect to the projected economy over the next two years and beyond.

Article by Dr. David Kass

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David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.