Chapel Hill, N.C. – We can stop debating whether the stock market has become more disconnected from the economy.

True, according to an academic study just completed by Rene Stulz, a professor of banking and monetary economics at The Ohio State University, and Frederik Schlingemann, a professor of finance at the University of Pittsburgh, it is. But don’t blame this growing disconnect on the COVID-19 epidemic, the professors show that the general trend of disconnects goes back at least 50 years.

Prior to this study, the debate over the disconnect between the stock market and the economy had generated more heat than light. As is customary in these times, it has been strongly politicized. On the one hand, many believe that the stock market is obscene and that stock market

It could hit a new high after the unemployment rate hit a new high. They believe that the market

Strength doesn’t tell us anything about the economy, nor does it tell us everything about how our political system rewards the upper classes.

On the other hand, many others argue that because the level of the stock market is – in theory – a function of expected future corporate earnings growth, there’s nothing particularly surprising about it being out of sync with what’s happening over the same period. As a result, this camp celebrates every stock market rise as proof that President Trump’s economic policies are working.

The professors’ response to this debate is that it can’t be resolved theoretically. As they wrote in their study, “The extent to which the stock market reflects the economy is an empirical question.”

They focused on several metrics, but perhaps the most understandable was the proportion of total employment from publicly traded companies. At the start of the professors’ sample in the early 1970s, 41.4 percent of nonfarm workers in the private sector were employed by publicly traded companies. In 2019, that percentage has fallen to 29.0 percent.

It is important to note that even in the early 1970s, less than half of U.S. nonfarm private employment came from publicly traded companies, and that percentage has declined only slightly since then. So the disconnect between the stock market and the economy is not entirely a new phenomenon.

This conclusion is reinforced when professors delve into the data. The long-term trend of disconnect with the economy doesn’t follow a straight line. In fact, they found that the current disconnect isn’t even the highest it’s been in the past 50 years.

Consider a “measure of underemployment” created by the professors, which reflects the degree to which a company’s market capitalization as a percentage of the total market differs from its percentage of total employment. If the publicly traded company with the largest number of employees also has the largest market capitalization, the indicator will be low, and so on. Thus, the higher the reading, the more “unrepresentative” it is – in other words, the greater the disconnect.

The chart at the top of this article plots the measure of unrepresentative professorial employment. Note that while the current readings are higher than in the 1970s, they are not as high as those registered at the peak of the dot-com bubble.

Professors believe that there are both short- and long-term factors at play here. The short term factor is market valuations. As valuations increase, the disconnect between the stock market and the economy will increase. This is an ominous finding, as their unrepresentative measure of employment is higher now than at any other time but the top of the dot-com bubble.

The longer-term factor, the professors argue, is the shift from manufacturing to a high-tech economy. In general, high-tech companies employ fewer people than manufacturers. The company currently at the top of the market capitalization list – Apple Inc.
, +6.35%

– with 137,000 employees, according to FactSet. By comparison, when General Motors
General Motors
, +0.15%

50 years ago, it was #1 in market cap and it employed over 600,000 people.

The bottom line. The disconnect between the stock market and the economy is growing, and the strength of the stock market tells us less about the true state of the economy than at almost any time in the last fifty years. This is not a political belief, but a statement of fact.

Mark Hulbert is a regular contributor to MarketWatch. His “Hulbert Ratings” tracks investment newsletters that pay a flat audit fee. He can be reached at

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