The Stock Market Is Not The Economy

Politicians of both parties have long used the ups and downs of the stock market as a horn to trumpet their success or as a cudgel to beat up their opponents for a failing economy.

But the stock market isn’t the economy – as the great Milton Friedman said, “The stock market and economy are two different things.”

In fact, the stock market is often not even a good indicator of the health of the economy.

The economy is the production and consumption of goods, while the stock market is a collection of shares of public companies. The economy is much larger than just the stock market.

Indeed, the stock market and economic performance are not always aligned. Strong stock market performance does not always signal a growing economy.

According to London Business School professors Elroy Dimson, Paul Marsh, and Mike Staunton, there’s only a slight positive correlation between GDP growth and stock performance. In fact, the professors observed there’s actually a negative correlation between national per capita GDP growth and stock performance.

For example, in 1982, the unemployment rate started high and finished higher. It entered the year at 8.6% and concluded at 10.8%, its steepest level since the Great Depression.

However, stocks surged in 1982. The S&P 500 gained 21.6% on the year, well above its average. Not only was unemployment rising, but seasonally adjusted gross domestic product fell during every quarter of 1982.

The anti-Reagan media called it the “Reagan Recession” and Republicans took a beating in the 1982 congressional elections.

There was a similar phenomenon in 2020. As John Rekenthaler, writing for Morningstar observed in September of that year, due to COVID unemployment rose far above 1982's apex, although the official numbers were lower, as they did not count workers who were sidelined but who expected to return to their positions. The first quarter's GDP slide of 4.8% was deeper than any suffered in 1982, and of course that was only the beginning. The second quarter's GDP decline was 31.4%.

Yet stocks rallied strongly, even as the economic news deteriorated. When stock prices began to rise in late March 2020, the consensus second-quarter GDP outlook was for an 18% decrease. Stock prices steadily climbed, while the GDP performed much worse than what was forecast.

It is worth noting that once again in 2020 a Republican President – Donald Trump – got the blame for the economy and Republicans took a beating at the polls, even as the stock market posted significant gains.

How does this bear on our current situation?

The bad news first: If you are buying stocks on a margin account you are – to put it bluntly – screwed, at least in the short term. The changes in government policies may make margin calls very likely and expensive as stocks rollercoaster on the latest media attacks on President Trump and his economic policies.

What’s the good news?

A major indicator of a strong economy – hiring – is up: In March 2025, the U.S. economy added 228,000 jobs, indicating strong hiring with the unemployment rate at 4.2%, at or near full employment.

Secondly, what is happening in the stock market isn’t an economic shakeout – it is a shakeout of stock prices inflated by government policies. In this case it is a turn away from globalism where American industrial workers subsidized cheap consumer goods for their fellow countrymen with depressed wages and offshored jobs due in large measure to tariff inequities. Moving jobs back to America will grow the domestic economy and increase America’s GDP.

Finally, stock prices tend to be driven by future expectations, and the future for the Trump economy looks good. Republicans, despite their often-dysfunctional internal politics, look poised to enact President Trump’s economic package. The bill makes the Trump tax cuts permanent along with a variety of other pro-growth policies – a drill baby drill energy policy to increase domestic energy production being chief among them.

As Milton Friedman said, “The stock market and economy are two different things.” And right now, it is a poor indicator of the overall health of the American economy. Investors will probably be wise to bet on America and against globalism as Trump’s policies squeeze the subsidies out of imported consumer goods, making manufacturing in America more attractive.

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