Just how connected are Wall Street and Main Street, anyway?
For the past few weeks, investors globally have been put through the wringer. Stock prices have plummeted, rebounded and then nosedived again—sometimes on the same day.
At the close of trading Tuesday, the Standard & Poor’s 500 index was down more than 10 percent from its high set on May 23. The Dow Jones Industrial Average, meanwhile, had dropped roughly 12 percent from its all-time record close of 18312.39 on May 19.
And the “real” U.S. economy, where goods are produced and services delivered, not just shares transacted? The latest government data, released a week ago, show an ongoing expansion that’s outperforming even optimists’ expectations.
The nation’s gross domestic product expanded in the second quarter at an annual rate of 3.7 percent, more than 2 percentage points better than in the first quarter and a big jump from the initial estimate of 2.3 percent.
The employment picture also is brighter than it has been in a long while, with unemployment down to 5.3 percent and another 215,000 jobs added in July.
So, how to make sense of these dramatically diverging trend lines? Is the current market slump a temporary phase that soon will give way to a resumption of the six-year bull run? Or is the economy sailing into troubled waters just beyond the horizon?
No one knows, of course. But it might be prudent to view what’s happening in the equity markets as fair warning. A big slowdown in the Chinese economy, marginal growth in Germany and France, Japan stuck in reverse—such factors matter to many U.S. companies.
A new jobs report is due out today. It might show another month of solid gains, or a worrisome slowdown. Either way, the stock market is likely to react—or, as we’ve seen often of late, overreact.
One day signifies little. But over time, the stock market and the “real” economy together tell a story that is not wise to ignore.
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