The stock market is a , which means its price reflects expectations for the future, and its price fluctuations reflect the market’s attempt to factor in changes to those expectations.
Believe it or not, in a given moment, the stock market does not care too much about the present state of things. That’s because expectations for the present will have been priced into the market days, weeks, and months in the past.
That is to say, the stock market reacts to news to the degree the new information 1) is not in line with what the market expected for the present, and 2) changes what the market expects for the future.
There are some more factors that drive stock prices over time. But in the context of digesting major news headlines, these are the two relationships to watch.
Because the stock market is so heavily dependent on expectations for the future, we inevitably get moments when stock market behavior appears to conflict with information about the present. Specifically, we sometimes get stock prices falling amid good news and rising amid bad news.
These are some of the most misunderstood moments in stock market cycles.
One of the more dumbfounding instances of this counterintuitive dynamic came during the spring of 2020 when the economy was .
After a sharp 35% drop, the S&P 500 .
But we continued to get disastrous economic reports for weeks as the stock market rallied.
This resulted in one of the . It was from the April 9 episode of “Mad Money with Jim Cramer.” Cramer’s show highlighted how the stock market had its while the chyron reported the cumulative three-week tally of unemployment insurance claims ballooned to 16 million.
People were confused.
Yes, the economy was in bad shape in April. But expectations were already extremely low, which meant the bar for developments that could cause stocks to go higher was also very low.
In retrospect, it seems the stock market got it right.
It wasn’t until June that we learned . And it wasn’t until July 2021 that we learned that the .
The stock market, for its part, recovered all of its pandemic losses and . (So, if you had dumped stocks as the news was getting bad and you had waited for good news to get back in, then you might’ve actually missed out on considerable gains you could’ve earned by just holding through the crisis.)
This was not just a pandemic recession phenomenon. The stock market begins its recovery long before the economy. JPMorgan’s Michael Cembalest reviewed the history in an October 2022 .
“There is a remarkable consistency to the patterns shown below: equities tend to bottom several months (at least) before the rest of the victims of a recession,” he wrote.
Historically, the . Sometimes the lead time is longer. Sometimes its shorter. — the dotcom bubble — the market bottomed the economy.
The U.S. economy for as the early in the recovery .
The good news had been that the economy was nevertheless still growing bolstered by and .
While we might not necessarily be heading for recession, we could be in the midst of a “” which has historically come with big stock market sell-offs followed by rapid rallies.
Growth scare-y have been accumulating recently. Since the beginning of March:
Delta Airlines that their “outlook has been impacted by the recent reduction in consumer and corporate confidence caused by increased macro uncertainty.”
According to the NFIB’s February Small Business Optimism , capital spending plans tumbled to their lowest level since 2020.
From the NY Fed’s February : “Households expressed more pessimism about their year-ahead financial situations in February, while unemployment, delinquency, and credit access expectations deteriorated notably.”
From the University of Michigan’s March : “Consumer sentiment slid another 11% this month, with declines seen consistently across all groups by age, education, income, wealth, political affiliations, and geographic regions. …expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets.”
Wall Street firms, including , , and cut their GDP growth forecasts.
Even President Trump euphemistically warned that Americans could face “” and a “” as his administration moves forward with . Treasury Secretary Bessent echoed the sentiment, warning of an economic “”
President Donald Trump speaks at the Justice Department in Washington, Friday, March 14, 2025. (Pool via AP) ·ASSOCIATED PRESS
Because the stock market is a discounting mechanism, you could argue that the current that began on Feb. 19 was the market pricing in the bad news we’re getting now.
This again speaks to the quandary investors face as they think about making adjustments to their portfolios. The stock market does not price in what’s going on today. It’s pricing in what’s expected in the weeks, months, and years ahead.
And that future is uncertain. It could be worse than what we currently expect. It could be better.
No one can say for sure that the stock market hit its low for the year. However, we also shouldn’t be surprised if we soon experience a sustained rally as incoming news just confirm gloomy expectations that have already been priced into the market.
In hindsight, divergences in the stock market and the economy make sense. But in the moment, it often wrong.
What right is when the stock market falls as you get information that indicates the present and near future are deteriorating, and vice versa.
However, there is likely to be a moment where the stock market moves higher as it resumes pricing in a better future. And that moment is likely to happen when the economic headlines are bad.
It all speaks to the .
Is it possible we learn that the economic situation proves far worse than what’s priced into the market today? Absolutely.
Can we guarantee that? Absolutely not.
There were several notable data points and macroeconomic developments since our :
Consumer vibes tumble. From the University of Michigan’s : “Consumer sentiment slid another 11% this month, with declines seen consistently across all groups by age, education, income, wealth, political affiliations, and geographic regions. Sentiment has now fallen for three consecutive months and is currently down 22% from December 2024. While current economic conditions were little changed, expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets.”
Small business optimism falls. From the report: “Uncertainty is high and rising on Main Street, and for many reasons. How future developments are resolved will shape the economy’s future. Confidence that the economy will continue to grow is fading.”
Inflation cools. The (CPI) in February was up 2.8% from a year ago, down from the 3% rate in January. Adjusted for food and energy prices, core CPI was up 3.1%, down from the prior month’s 3.3% level.
On a month-over-month basis, CPI and core CPI were up 0.2%.
If you annualize the six-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 3.6%.
Inflation expectations deteriorate but remain cool. From the New York Fed’s : “Median inflation expectations increased by 0.1 percentage point at the one-year horizon, to 3.1%, and were unchanged at the three-year and five-year horizons (both at 3.0%) in February. … Median inflation uncertainty — or the uncertainty expressed regarding future inflation outcomes — increased at all three horizons.”
Gas prices tick lower. From : “Despite increased demand, gas prices dipped lower this week, with today’s national average at $3.07 per gallon, about 3 cents lower than a week ago. This drop at the pump comes as many travelers gear up to hit the road for spring break and drivers may be surprised to find gas under $3 in 31 states.”
Card spending data is holding up. From JPMorgan: “As of 07 Mar 2025, our Chase Consumer Card spending data (unadjusted) was 2.6% above the same day last year. Based on the Chase Consumer Card data through 07 Mar 2025, our estimate of the US Census February control measure of retail sales m/m is 0.20%.”
Mortgage rates tick lower. According to , the average 30-year fixed-rate mortgage declined to 6.65% from 6.63% last week. From Freddie Mac: “Despite volatility in the markets, the 30-year fixed-rate mortgage remained essentially flat from last week. Mortgage rates continue to be relatively low versus the last few months, and homebuyers have responded. Purchase applications are up 5% as compared to a year ago. The combination of modestly lower mortgage rates and improving inventory is a positive sign for homebuyers in this critical spring homebuying season.”
There are in the U.S., of which 86.6 million are and (or ) of which are . Of those carrying mortgage debt, almost all have , and most of those mortgages before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
Unemployment claims tick lower. declined to 220,000 during the week ending March 8, down from 222,000 the week prior. This metric continues to be at levels historically associated with economic growth.
Federal layoffs brought by the Trump administration’s Department of Government Efficiency appear making their way into the data. Initial claims filed by federal employees came in at 1,580 in the week ending March 1.
Job openings rise. According to the , employers had 7.74 million job openings in January, up from 7.51 million in December.
During the period, there were 6.85 million unemployed people — meaning there were 1.1 job openings per unemployed person. This continues to be . However, this metric has returned to prepandemic levels.
Layoffs remain depressed, hiring remains firm. Employers laid off 1.63 million people in January. While challenging for all those affected, this figure represents just 1% of total employment. This metric remains at prepandemic levels.
Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.39 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a in the labor market.
People are quitting less. In January, 3.27 million workers quit their jobs. This represents 21% of the workforce. While the rate ticked up last month, it continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job; workers have fewer outside job opportunities; wage growth is cooling; productivity will improve as fewer people are entering new unfamiliar roles.
Offices remain relatively empty. From : “Peak day office occupancy was 63.4% on Tuesday last week, down six tenths of a point from the previous week. Philadelphia hit a post-pandemic record high of 53.6% on Tuesday, up nearly a full point from the previous week. The average low was on Friday at 36.4%, up 1.2 points from last week.”
Earnings look bullish: The long-term for the stock market remains favorable, bolstered by . And earnings are the .
Demand is positive: Demand for goods and services is , and the economy continues to grow. At the same time, economic growth has from much hotter levels earlier in the cycle. The economy is these days as .
But growth is cooling: The economy remains very healthy, supported by , though momentum is slowing. Overall, job creation , and the Federal Reserve — having — has .
Federal Reserve Chair Jerome Powell speaks at the 2025 U.S. Monetary Policy Forum on March 07, 2025 in New York City. (Photo by Spencer Platt/Getty Images) ·Spencer Platt via Getty Images
Actions speak louder than words: We are in an odd period given that the hard economic data has . Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, is that the hard economic data continues to hold up.
Stocks look better than the economy: Analysts expect the U.S. stock market could , thanks largely due to . Since the pandemic, companies have adjusted their cost structures aggressively. This has come with and , including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is .
Mind the ever-present risks: Of course, this does not mean we should get complacent. There will — such as , , , , etc. There are also the dreaded . Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that and are developments that all long-term investors to experience as they build wealth in the markets. .
Think long term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets over time. , and it’s a streak long-term investors can expect to continue.
Heather Ochoa is a news writer at the Failsafe Podcast. She has been writing about politics, health, business, parenting and finance for over a decade. She also loves to go hiking in her free time.
