When Experts Say 'The Stock Market Is Not the Economy,' What Do They Mean?

The marketplace turmoil caused by President Trump's 2025 tariff announcements has experts reassessing a longstanding maxim: "The banal marketplace is not the economy."

Brenton Harrison, a certified fiscal planner, laminitis of New Money New Problems, and a subordinate of Investopedia's Advisor Council, pointed to reasons to rethink the dictum. Many investors present commercialized for themselves via apps similar Robinhood Markets Inc. (HOOD) and different platforms, which has "increased Main Street’s involvement successful Wall Street," helium said. "By having tegument successful the game, Main Street investors are much attuned to activities connected Wall Street that interaction their regular lives and portfolios."

So, is this portion of a narrowing of the expected spread betwixt Wall Street and Main Street? We suggest imaginable answers below.

Market Signals and Economic Reality

The conception that the banal marketplace isn't the system is decades old. Kai Ryssdal of "Marketplace" popularized the operation conscionable earlier the 2008 Financial Crisis, emphasizing that 1 shouldn't confuse what's happening successful 1 with the other. The stock market tracks the worth and expected aboriginal net of publically traded companies, portion the system comprises each U.S. production, consumption, employment, and commerce.

Ryssdal inactive stresses the point, though successful a mode that's someway some blunter and much nuanced. For example, successful March 2025, helium seconded a Bluesky station by noted economist Paul Krugman, who repeated the operation 3 times, past wrote, "Nonetheless, beatified sh*t," citing marketplace fears astir Trump medication tariffs.

What the Phrase Means

As Krugman enactment it a fewer years ago, "The narration betwixt banal performance—largely driven by the oscillation betwixt greed and fear—and existent economical maturation has ever been determination betwixt escaped and nonexistent." This means, arsenic a March 2025 Economic Policy Institute study enactment it, "More often what is happening to banal prices gives america nary penetration into the wider economy."

The marketplace is besides not precise typical of the U.S. economy:

• The main index, the S&P 500, has conscionable 500 companies retired of America's 33 cardinal businesses.
• Data noting that implicit 60% of Americans ain banal tin beryllium misleading, since those successful the apical 10% by wealthiness ain 87.2% of equities and communal money shares.
• S&P 500 companies gain astir a 3rd of their gross overseas.

Still, immoderate reason for utilizing the market's ups and downs arsenic an economical barometer. For example, during his archetypal administration, President Donald Trump invoked a rising banal marketplace arsenic grounds of his economical stewardship, suggesting policies doing the other should beryllium abandoned.

That would mean a  “stock marketplace veto," mostly by the wealthiest Americans (and not a fewer foreigners). Policy shifts from the New Deal to the Affordable Care Act (ACA) successful 2010 and beyond person caused marketplace drops. Yet, regarding the ACA, the marketplace absorption wasn't adjacent a bully barometer of however healthcare stocks would fare. For example, we cipher that contempt an archetypal terms drop, the Health Care SPDR ETF (XLV) roseate astir 387% betwixt the ACA's transition and April 2025—higher than the S&P 500 index's awesome 354%.

Updating the Relationship Status

There's a saying among investors and analysts that successful a crisis, everything is correlated, which means that everyone is selling everything. In this context, possibly it's adjuvant to adhd that, portion successful mean times the banal marketplace does not bespeak the economy, successful times of situation some are greatly affected.

For example, Wolfers said there's bully crushed to instrumentality heed of the market's absorption to Trump's tariffs. The turmoil successful equities and bonds is grounds that Wall Street isn't buying Trump's statement that his tariffs, which would fundamentally restructure planetary trade, volition pb to greater profitability and a much robust American economy, helium says.

"Ordinarily, I person a batch of sympathy for the connection that the banal marketplace is not the economy," Wolfers said. "But I deliberation this clip it's much cardinal to knowing what's going connected successful the economy."

Crucially, plunging markets tin deed the system by damaging user sentiment. Even though astir stocks are held by wealthier families, erstwhile markets and the worth of 401(k)s are falling, this dominates quality broadcasts, Main Street takes notice, with radical often rapidly cutting their spending, which successful crook slows economical growth.

"This month’s marketplace enactment shows that companies and governments admit however accelerated user sentiment tin alteration an economy," Harrison said. "In past times of turbulence—the Great Recession, the aboriginal 2000s tech bubble—some of the marketplace forces that led to a clang were successful question for years earlier Main Street was alert of them. ...Recent marketplace events person shown that the clip betwixt a Wall Street enactment and Main Street’s absorption to it has whittled down to days." 

The Bottom Line

"The banal marketplace is not the economy" is simply a reminder that banal marketplace troubles don't needfully pb to slowing economical growth—hence economist Paul Samuelson's gag successful 1966 that "Wall Street indexes [have] predicted 9 retired of the past 5 recessions."

That said, markets tin power the economy. They assistance businesses money growth, connection investments for millions of Americans, and perhaps, arsenic Wolfers suggests, supply important insights astir definite policies. The narration is frankincense much nuanced than screaming headlines astir banal marketplace crashes mightiness pb 1 to believe.