Have the markets become unmoored from fundamentals?
The strong recovery of financial markets in recent months has far outpaced the real economy’s more mixed rebound. We show that a broadly similar divergence has been a feature of every U.S. recession for more than 50 years. Furthermore, the timing of such divergences has typically been a powerful signal of a forthcoming macro recovery.
Following an unprecedented, virus-induced decline through the spring, the U.S. economy posted a remarkably strong rebound during the summer. Third-quarter real GDP growth appears to have expanded 30% (on an annualized basis)—the strongest quarterly pace of the post-war period. Similarly, the labor market has restored well over 10 million jobs.
But, even so, the overall level of economic performance remains weak. Real GDP is down roughly 3-4% relative to its level in Q4 2019, and the labor market still has a deficit of more than 10 million jobs. Available macro indicators point to a somewhat softer pace of recovery in the months ahead, even as Washington has failed to reach agreement on another round of fiscal stimulus—including much-needed unemployment benefits. All of this is occurring in the face of a historically contentious presidential election, with the controversies threatening to drag on until well after election day. And the virus remains a severe concern.