Why Markets Don’t Wait for the Data
Prices move on expectations; statistics arrive later
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GDP and inflation are reported weeks or months after the fact. Stock prices change every second. That timing gap explains much of why markets and the economy can seem to disagree.
Prices are forecasts
A share price is what investors will pay today for a claim on a company’s future earnings. When the outlook changes, the price changes at once, long before the statistics catch up.1
Rates change what the future is worth
When interest rates rise, future earnings are worth less today, so prices can fall even while the economy grows. That is the link to the rate chart in Inflation, One Grocery Bill at a Time.
Two clocks
The economy runs on the clock of production and pay. Markets run on the clock of expectations. Neither is wrong; they answer different questions. For where this series started, see What GDP Actually Measures, and for the data itself, the S&P 500 on FRED1.
Footnotes
This is why markets often rise while the economy is still shrinking: investors are pricing the recovery, not the present. ↩
Sources
- S&P Dow Jones Indices, via FRED (SP500) fred.stlouisfed.org