The Economy Is Not The Market

“Give me a one-handed Economist. All my economists say ‘on ONE hand…’, then ‘but on the other…”― Harry Truman.

I’m often sent snippets and commentary from various economists — well-meaning professionals who aim to explain what the market should or should not be doing, based on their models of economic fundamentals. But there’s a consistent and critical flaw in their reasoning:

They assume the stock market is a direct reflection of the economy. It isn’t.

The stock market is not a mirror of GDP, inflation statistics, or employment data. It is a pricing mechanism, not for current economic conditions per se, but for human sentiment about the future. It reflects the collective beliefs, emotions, expectations, and often misperceptions of its participants. And these participants are not rational. They never have been.

To be blunt the vast majority of market participants are about as a rational as a teenager who has had their phone taken off them.

This is precisely why concepts like the Efficient Market Hypothesis (EMH), while elegant in theory, fail in practice. EMH assumes that all known information is immediately and rationally priced into markets, leaving no room for persistent mispricing or irrational exuberance. But the historical record shows otherwise.

Examples Where Markets Ignored Economists:

• 2009 (Post-GFC Recovery):
  The global economy was still reeling. Unemployment was high, and consumer confidence was low. Economists essentially predicted a slow, drawn-out recovery. Yet the stock market bottomed in March 2009 and began a significant bull run. Why? Because the market had already priced in the worst and began to look ahead, not with data, but with expectation.

• 2020 (COVID Crash and Rebound):
  As the world locked down and the global economy appeared on the brink of collapse, the economic outlook was grim. Yet after a brief crash in March, equities staged a sharp recovery. The Nasdaq reached new all-time highs within months. The economy was in COVID induced slumber, but the market was in full rally mode.

The disconnect was driven by stimulus, speculative optimism, and a future-facing narrative, rather than economic fundamentals.

• 2022–2023 (Rate Hikes and AI Euphoria):
  Central banks raised interest rates aggressively. Traditional economic models suggested that risk assets, particularly growth stocks, should decline under conditions of monetary tightening. Yet the opposite occurred — AI-driven tech stocks surged, and the broader market followed. The narrative outpaced the pundits.

The Lesson

Price does not move in lockstep with economic indicators. Instead, it reflects perceptions of what may come, and those perceptions are shaped by emotion as much as logic.

If you’re trading or investing, it’s essential to understand this. You can study balance sheets, economic data, and monetary policy — and still be blindsided — because markets respond not to what is, but to what crowds believe is coming next.

That’s why the only accurate compass is the price itself.

In short:

• The market is not the economy.

• Market participants are not rational.

• Price is the final arbiter of truth.

The market will never respect your narrative.