It’s become something of an article of faith that the stock market is delinked to the real economy. This isn’t accurate since the stock market isn’t valuing businesses, or the economic environment, of today. The market is looking six months or more ahead.
The market is looking for what is simplistically called a v-shaped recovery in which a sharp economic downtown (like the one we’re in) ends with a very sharp economic upturn. For this to occur, the economic pain needs to kept at a minimum through countercyclical spending, which government has been doing, and we need stimulus to provide the boost back to normal growth.
It’s that last part where the market isn’t seeing the trouble on the horizon. The Republicans have all but ended any debate on additional stimulus while the Democrats are hard at work on the next package. The question is how long it takes the market to realize that the recovery it’s already pricing in is in trouble? At what point do participants decide to take risk off their balance sheets given that Senator McConnell and President Fats have concluded they’ve done enough?
My guess is we get the first taste of it tomorrow. And I bet by the end of the week the tune in Washington changes back to the one called by Speaker Pelosi.
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