The stock market and the economy are observably decoupled. I’m a trader by profession and if I traded based on the real economy rather than, say, the Fed’s latest shenanigans, I’d be ruined in a heartbeat. Just this past month we’ve seen the most crippling blow to the real economy in over a century and a massive stock market rally.
But if the stock market is trying to predict the future, instead of describe the present, the big question is what window does the stock market operate on, and what window do you? Maybe stocks are going up because the aggregate feeling is that the economy will recover quickly.
Okay, but in this case a better assumption seems to be, the stock market is a function of the economy and political interventions. Or would you suggest this function does not depend on the economy at all?
I wont't say that the stock market doesn't depend on the economy at all, because that's also obviously incorrect. A total economic collapse (think dollars stop being worth money) would obviously affect the stock market just to list a limit case. But on the margins, no, the economy doesn't move the stock market in any appreciable fashion in the time frame a trader operates. In the extremely long term though the health of US capital markets is a function of the size and broad diversification of the US economy.
Operationally speaking, the market moves based on the actions of market participants and thus the primary intellectual challenge is predicting those actions. Since currently the Federal Reserve working in concert with the US Treasury is an active market participant with unlimited capitalization that is telegraphing its moves, that is what's moving the market. Literally nobody trades on the reality that thousands of small businesses are in danger of going bust. Personally I think it's awful, but I don't have the capital to fix it.
