Is the Stock Market Social Distancing Itself From the Economy?

With the S&P 500 rising about 40% from its March 23rd low and NASDAQ closing above 10,000 for the first time today, is the stock market social distancing itself from the economy with a 13.3% unemployment rate in May?

The Federal Reserve today released its projections for 2020, 2021, 2022 and beyond.  These projections are optimistic. Although they forecast a 6.5% decline in real GDP for 2020, the projections of 5.0% growth for 2021 and 3.5% growth for 2022 are consistent with a strong economy. Their longer run (beyond 2022) projection is for 1.8% growth.

The current unemployment rate of 13.3% for May is projected to decline to 9.3% by the fourth quarter of 2020, and then to 6.5% in the fourth quarter of 2021 and 5.5% in the fourth quarter of 2022. These projected rates for 2021 and 2022 are very close to the average unemployment rate of 5.7% since 1948 and 6.2% over the past 50 years. Beyond 2022, the Federal Reserve projects an unemployment rate of 4.1%.  The unemployment rate of 3.5% in February was a 50 year low.

Furthermore, inflation is projected to be only 0.8% in 2020, 1.6% in 2021, and 1.7% in 2022.  It is then expected to equal 2.0% in the longer run.

The Federal Funds rate is projected to remain at 0.1% through at least 2022 and then rising to 2.5% in the longer run. Therefore, the Federal Reserve is not expecting to increase interest rates at least through the end of 2022.

The stock market is forward looking.  Its very strong performance since the March 23rd lows is consistent with the Federal Reserve’s forecasts of a recovering economy with healthy GDP growth, improving unemployment, and low inflation.

The stock market may be social distancing itself from today’s weak economy, but not with respect to the projected economy over the next two years and beyond.