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The Great Disconnect: Stocks Vs. Real Life

Gary Gordon profile picture
Gary Gordon


  • Deep recession. Depression. Whatever people wish to call it, yes… it's that dreadful.
  • U.S. stocks in the total market Wilshire 5000 Index are roughly halfway between their March lows and record highs from February.
  • The financial system’s issues alone should be enough for investors to recalibrate their economic expectations.
  • A significant percentage of the economy is relying on the Federal Reserve to “get by” to make payroll and pay interest on debt obligations.
  • Eventually, the stock market responds to an accumulation of bankruptcies.

Leading into 2020, the economy was growing at a modest pace (1.9%). By the end of the second quarter, the economy will have recoiled at its quickest clip (-25%+) since the 1930s.

Similarly, at the start of the year, unemployment for working-aged individuals was 3.5%. By the end of Q2, the official unemployment rate may spike as high as 20%.

The economic facts are as disheartening as they are sobering. For example:

(1) Consumer confidence plummeted to a 47-year low.
(2) U.S. retail sales dropped by the most ever in March.
(3) Small business confidence dropped to a record low in April.
(4) 84% of small firms will pay less than half their rent in May; 40% will skip rent altogether.
(5) State budgets will rack up $100 billion in deficits in 2020.

Deep recession. Depression. Whatever people wish to call it, yes, it's that dreadful.

On the other hand, it has not been quite as bad for financial markets. U.S. stocks in the total market Wilshire 5000 Index are roughly halfway between their March lows and record highs from February.

Without question, there's a disconnect between U.S. stocks and the real economy.

Granted, there are those who optimistically tout the imminent reopening of states and businesses across the country. Yet, is it really the case that the post-virus economic environment will snap back quickly? Or is it far more likely that significant damage has been done to global supply chains and domestic demand across a wide range of industries (e.g., energy, transportation, manufacturing, hospitality/tourism, auto, sports/leisure, restaurants, basic materials, lending/insurance/financials, commercial real estate, brick-n-mortar retail, consumer discretionary, etc.).

The financial system’s troubles alone should be enough for investors to recalibrate their economic expectations. The dramatic underperformance of the SPDR Financial Select Sector SPDR (XLF) relative to the S&P 500 SPDR Trust (

This article was written by

Gary Gordon profile picture
Gary A. Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. He has 30 years of experience as a personal coach in “money matters,” including risk assessment, small business development and portfolio management. He favors tactical asset allocation strategies over "set-it-and-forget-it" investing.Gary is often asked to consult as an educator. He has taught financial concepts in Mexico, Singapore, Hong Kong, Taiwan and the United States.As a Certified Financial Planner (CFP), Gary has distinguished himself as a reputable and trusted investor advocate. Gary’s participation on local and national radio has spanned more than two decades. He writes commentary at his web log, TheStockBubble.com.

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Comments (160)

ijeff profile picture
I'm starting to think there's another even great disconnect today. Real life today verses real life as it once was.
Bhughes7918 profile picture
OPY would make it thru lots of cash!
Oppenheimer Holdings Inc. Announces Share Repurchase Program

CNW Group•May 15, 2020

NEW YORK , May 15, 2020 /CNW/ - Oppenheimer Holdings Inc. (OPY) today announced that its Board of Directors approved a share repurchase program that authorizes the Company to purchase up to 530,000 shares of the Company's Class A non-voting common stock, representing approximately 4.2% of its 12,636,523 currently issued and outstanding shares of Class A non-voting common stock. This authorization will supplement the 98,625 shares that remain authorized and available under the Company's previous share repurchase program covering up to 640,000 shares of the Company's Class A non-voting common stock, which was announced on July 26, 2019 , for a total of 628,625 shares authorized and available for repurchase. The share repurchase program is expected to continue indefinitely.
Major bear markets going back to 1929 have behaved in a very similar way. These markets are 1929-1932, 1973-1974, 2000-2002, and 2007-2009. They last 2 to 2 and 1/2 years. They drop 50% or more from the high. There is a strong initial drop and then a recovery in the 1st year of the bear market. Overall, they do not drop much in the first year of the bear market. They drop far more percentage wise after the first year of the bear market. I think this is the buy the dip syndrome in the first year of the bear market.

I think we're in one of these bear markets now. The only difference this time is the total influence of the FED (which may do something to the timing of the bear market). But, so far, this market has performed very much like the bear markets cited above.

In 1921, the market was at it's lowest level ever recorded on the Shiller Index 2.5 years after the last pandemic. Food for thought.
This is an insightful analysis.
StkAnalystGuru profile picture
You are right Gary, the market is way too high, but the Fed is injecting so much capital and the hope for Remdesivir kicked the Fibonacci pattern up an extra level, keeping the bull alive longer than it should have been! The 50 DMA normally would have been resistance, but this is ridiculous. My work indicates strongly that MONDAY will be the high, so be prepared for a big GAP DOWN on Tuesday... You all are welcome.
@StkAnalystGuru — I hope you’re right!
StkAnalystGuru profile picture
NOPE! THE FED is buying SOO many futures every night, you can SEE the exaggerated huge buying spikes at like 3am or 4am, shoving the SPX futures up over and over again, the game is rigged. It does NOT pay to short anything overnight. Buy only now until further notice.
Austin Rogers profile picture
Thanks, @Gary Gordon for an excellent overview of the present situation. Are you worried at all about the possibility of a wave of downgrades in BBB-rated corporate bonds? Last I looked, I believe VCSH held roughly half BBB-rated bonds. Intuitively, I would think that VCSH's managers would need to sell the fallen angel debt at a discount in order to get it out of their fund.
Petrarch profile picture

I know its very, very hard to comprehend this
Its the same reason we are bad at dealing with exponential change.
We all find it hard to imagine anything outside a limited set of parameters

The market looks into the far future and extrapolates
Right now it sees low inflation, very low interest rates and a return to growth at some point
None of those may be true
But current or even past data are not really all that useful
That's why most pundits and prognosticators if not all, get it wrong, constantly.
This is not due to lack of intellectual horsepower, it is due a lack of imagination

Every investment is mostly about expectations
If you believe people won't travel or eat out, buy homes or get haircuts ever again then ok.
But the market right now thinks otherwise.
That's all.

@Petrarch Yes "We all find it hard to imagine anything outside a limited set of parameters" and "the market right now thinks otherwise". But the market consists of all of us, so what's really driving the market?
IMO, the primary reason the market continues up has little to do with a recovery. It’s more about the Fed pumping cash into the economy, creating a FOMO-driven stock market.
In one 45 day period, this Country went from the best to a depression. I love our President but strongly disagree with his "V" shaped recovery vision. I think this damage is going to take at least 3 years to correct, if ever.
woppenhe profile picture
When and IF we get a vaccine, fine. But otherwise we will have to learn to live with the virus. This is not new for other generations, just for some of us. Polio, Whooping cough, Measles, AIDS, SARS, Spanish Flu, Plague, and others long forgotten altered the expectations and ways people went about their daily lives. This is different yes, with perhaps a 5% (greater in some reports) fatality rate for those contracting; people apparently will be left to their own devices and desires to avoid the germ, so it is now up to each of us to decide when and how we shop, travel, and recreate. Opening up means nothing to a virus. It will continue until it cannot find an immune vector. With perhaps a 2% penetrance to date, we have a long way to go. Markets will adjust right along with us. Avoiding obvious exchange areas, such as airports, sports venues, rock concerts, intimate restaurants could be one theme. Working from home (FANG, home improvement) could be another. Traveling by RV to avoid public mixing as much as possible could be another. And prevention and fortification / PPE / testing in schools, prisons, hospitals, factories, and nursing homes, yet another. Just think about the possibilities while observing human behavior as it plays out. Eventually it will fade into the background(vaccine or herd immunity) How much human damage in the meantime is up to us; we have established that we can control the rate, but at great economic cost. So we will have to learn to live with the virus. And the next one as well.
Dale Roberts profile picture
So funny, I was just looking at a bunch of PE and forward PE charts for US stocks.

The stock market makers think this global pandemic is the best thing to happen to company and economic prospects in decades.

I guess I'm just reading too much gloomy pandemic stuff. ;)

@Dale Roberts – It’s all Fairy tales and magical thinking. They just make @#$& up. The bond market and gold are calling BS on their BS.
Valued Rug profile picture
Just read this interesting piece by an investor in the U.K. who made millions off the back of the financial crisis and who sees a similar story playing out now:


The gist is, QE money ends up in the hands of the rich, who tend to spend it on financial assets (even more so when restaurants, theatres and tourism is shit down). Thus markets go up.

Can the real economy ever halt this?
If there is a wave of bankruptcies, there will be lots of assets for the healthy to pick up cheap.
Great article, thanks. Add in the likelihood of negative interest rates too if a further leg down breaches previous low. I’m Looking for negative interest rates, fed buying equities and a dollar reversal to suspect where the low may be found. None of those three have occurred yet. Second wave of Covid likely as soon as schools re open and kids start mingling together. IMHO
kbaba profile picture
With such a negative outlook, why no short positions or hedges? Should be easy money in such an inflated market with the virus not going away soon
Proud Capitalist profile picture
Fundamental facts wrong: "Leading into 2020, the economy was growing at a modest pace (1.9%). Why did you make that number up? Did you choose it because 1.9% sounds worse than 2.0%? The actual rate was 2.1% in the fourth quarter (www.bea.gov/...), and the growth for all of 2019 it was 2.3%. Is this bias? Hey, I know its 0.4%, BUT that's BILLIONS of dollars. How do you get this number wrong?

StkAnalystGuru profile picture
It's really IMMATERIAL, is it not? Whether GDP was 1.9% or 2.3%, it does not alter his point or change his message or thought process in ANY way. Try not to be so myopic and argumentative, or pompous, or caustic, perhaps? Just a thought. Cheers.
Dale Roberts profile picture
Thanks @Gary Gordon I am writing on same and can only come to many of the same conclusions. The stock markets can certainly disconnect from the economic realities, and they can be forward thinking. But there's nothing to see in the future it's very dark. But it's an obvious 'guess' that there will be no quick economic recovery. And hence the bankruptcies and other bad numbers pile up, and the markets eventually take notice.

There has never been a major stock market correction without a 'sucker rally'.

These do not look and feel like the conditions to set the table for the first major correction without a re-test of lows, and perhaps more.

We have to do the economic restart right, and only once. If we goof that up with second and third waves of outbreaks, pencil in that Depression

thumb.ai profile picture
If the voting machine popularity of the top 5-7 stocks turns into the weighing machine of valuation, while unemployment is still above 10%, I see another stock market correction.

However, if enough people get back to work quick enough, then the time of danger passes.

Bankruptcies only worry me for their impact on unemployment. Otherwise the dominant market cap weighted funds like S&P 500 will shrug them off.
MkZSM profile picture
I think right now the question is at what levels will market sell off to because I don’t think we will make lower lows in my opinion unless warren buffet see’s something we all fail to see.
I'll put my money on Carl Icahn vs Buffet any day of the week!
How many of you here just watched the rally on the sideline? There were so many dips since march and if you bought any of one of them, you made money. That's all it matters. Look at MSFT, TWLO, PYPL, ROKU, SHOP, FSLY and so many other tech names. If you own a few of these names and book insane amount of profit along the way, you would not be here complaining why stock doesn't go down.
Don't really understand why people would prefer the market to go down. The economic suffering is bad enough. Looking for it to improve and the market to lead the way.
Because valuations in equities are based on the view that a company is worth investing in for its earnings. These stock prices do not justify the valuations.
So what? Buy the dip then trim some or close it with 40% plus gain and move on.
Greg Gallagher profile picture
@Gary Gordon The Nasdaq Index closed in positive territory today (up just +0.1% for the year); but this is a big "Divergence" from the other indexes and almost every other market indicator (or recent economic report). The S&P 500 comes in 2nd place at -10.8% YTD, Dow -16.3%, NYSE -20.1%, and last place Russell 2000 -23.1%. If you look at the stocks driving the Nasdaq's performance, it hasn't change much in the last 5 years, FAANG stocks account for the biggest share of the Nasdaq's gains: FB +2.93%, AMZN +28.1%, APPL +3.44%, NFLX +34.9%, and GOOGL +2.23%. Since the market doesn't like conflict ("Divergence"), either the Nasdaq must fall or the rest of the indexes must have a huge rally soon for parity to be restored. It is hard to believe that these 5 stocks can hold up this market for much longer.
Nasdaq and other major indices may chop around these levels and perhaps the rest starts to bottom and head up. I hope so because the economy could do with a great deal of improvement and I think the market has an even chance of forecasting better days ahead.
"""State budgets will rack up $100 billion in deficits in 2020."""
Try at least 5x that, maybe 10x.
AEGISBMD profile picture

Concur. Most states are required by law to have a balance budget. How they gonna do that? Especially with bonds for state and municipal projects about to get raped on their interest rates.
They’ll have to cut their bloated budgets won’t they.
They'll have to cut Pensions, incl probably those of some SA investors
States need a new Natl Law to enable them to go Bankrupt and get Rid of Police/Fire-men who make 75-125% of their working pay (from 25-50)_ and then live off the state for 40 years incl double dipping on SS and getting free medical care.
No state can afford that
and all have made those promises.
We're going to have an L-shaped recovery, a hockey stick. The fundamentals are real. Mr. Market is simply experiencing Treasusy-boosted, irrational exuberance. It's going to be a turbulent ride, with equal highs and lows, with a slight trend upward, taking years of incremental growth to get back where it started.
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