The Growing Disconnect Between US Stocks and Economy

There is currently a large disconnect between the stock market in the United States and the country's economy, especially in the tech sector. So why is this the case?

According to Mati Greenspan, the Founder of Quantum Economics, there's always some level of disconnect between what's happening in the stock market and what's happening in the economy.

"This is basically due to the creation of money and how money flows. But right now at this moment in time, that disconnect is basically wider than ever," Greenspan explained during his session at the TradeON Summit titled What's Around the Corner for FX: US Elections, COVID-19 and More.

"The economy has been tanking, we saw these forced lockdowns across the world due to the coronavirus, and even though there was an initial crash in the stock markets, we've already completely recovered and is once again zooming towards the sky."

US Federal Reserve is keeping the stock market afloat

According to Greenspan, this disconnect has been driven by two main causes - the US Federal Reserve and the coronavirus pandemic attracting first time traders to the stock market.

"The main reason for this is because of the central banks, which is the Federal Reserve in the United States, their initial response to COVID-19 was large injections of cash, so copious amounts they poured into the economy - we're talking about trillions of dollars, multi-trillions, in just about every major economy."

"That money generally goes directly to the markets. I mean that kind of money, when it's created by central banks, it goes to the stocks, it goes to bonds, it goes wherever investors feel they can use the cash."

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The second reason, as pointed out by Greenspan, is due to the influx of new traders to the markets. As Finance Magnates has reported, the COVID-19 pandemic has brought a new wave of traders into the markets, driven by heightened Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders Read this Term.

This, coupled with the fact that a lot of people have more time on their hands due to working from home and lockdown restrictions, in addition to a lot of traditional gambling avenues being closed - such as sports betting and pokies, people have been looking to the stock market to get their fix.

Greenspan goes onto to explain how the accessibility of the internet, the gamification of the industry, and extra stimulus into economies have all led to an uptick in the number of people becoming traders.

However, as Greenspan notes, this has led to interesting market moves - whether it's Tesla's stocks being overvalued, or after Hertz announcing it was bankrupt, the company's stock took off and zoomed upwards because newbie traders came in and flooded the firm's stock.

Reality will catch up with the markets sooner or later

With the stock market acting irrationally despite the worsening situation in the United States amid COVID-19, how long will it be until we see some kind of correction? According to Greenspan, it's hard to tell when the correction will happen, but sooner or later, reality will catch up.

"I believe at some point, the markets are going to have to face reality, or reality is going to catch up to the markets. You can't have it both ways. But, of course, markets can remain irrational for longer than you can stay solvent."

"... You can never really know what's going to happen in the short-term… what's going to happen a week from now is anybody's guess. Some news can come out that totally shakes things up, COVID-19, for example, was the biggest case of that, but even since then we have all types of announcements and news events that can really change the dynamic and change the flow of things in the market. It's very difficult to foresee things like that, we're just going to have to keep our fingers on the pulse."

This was an excerpt from Mati Greenspan's session at the TradeON Summit. For the full video, register for the free event here.