The economy drives stock performance. Stocks go up when the economy is buzzing, and go down when the economy slows. But this simple formula masks a great deal of variation within the economy, timing issues, and debate on the magnitude of change. The details can cause stocks to re-rate all of a sudden as investors update their earnings estimates, even if the headline economic numbers look good.

Economic impacts can be uneven. Economic changes propagate through the stock market in different ways. For example, cyclical stocks usually go down the most when there is a recession, and go up the most when there is a recovery. Defensive stocks usually go down the least when there is a recession, but lag the recovery. As another example, there was a divergence between goods spending and services spending during COVID, which helped services providers like Netflix during the pandemic and boosted retailers like Wal-Mart during the recovery. More nuanced shifts in the economy occur all the time (such as shifts between discretionary vs non-discretionary spending, spending by income levels, or immigration trends), and determining which sectors will be impacted is the primary job of an economic analyst.

The economic calendar is an important catalyst. New economic data is reported almost everyday in the U.S. Most of it is reported on a predictable schedule. Analysts will make forecasts for the most important data, and beats/misses can move stock prices. Other large economic markets such as the European Union or China also have an economic calendar that can impact local stock prices, and sometimes even U.S. stock prices. We regularly publish notes on important economic releases and implications for the stock market.

Financial crisis are rare, but can have severe impacts. Our general thesis is that recessions are short and shallow unless there is a financial crisis. Financial crises are usually associated with excess debt, which can take years to unwind. As consumers/businesses delever they have less money available to spend or invest. Fortunately, we have a team tracks developments in the financial services industry. Hopefully we can anticipate the next crisis, or at least figure out how to minimize damage when it occurs.