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CHAPEL HILL, N.C. — We can stop debating whether the stock market has become more disconnected from the economy.

It undeniably has, according to a just-completed academic study by Rene Stulz, a professor of banking and monetary economics at Ohio State University, and Frederik Schlingemann, a finance professor at the University of Pittsburgh. But don’t blame this growing disconnect on the COVID-19 pandemic; the professors show that the trend toward a greater disconnect dates back at least five decades.

Prior to this study, the debate about the stock market-economy disconnect had generated more heat than light. As usual in this day and age, it had become intensely politicized. On the one hand, many found it obscene that the stock market (SPX)  could be hitting new all-time highs in the wake of record unemployment. They argued that the market’s (DJIA)  strength tells us nothing about the economy and everything we need to know about how our political system rewards the upper classes.

On the other hand, many others argued that, since the stock market’s level — in theory — is a function of anticipated future corporate earnings growth, there is nothing particularly surprising about its disconnect from what is happening contemporaneously. Those in this camp therefore celebrate every stock-market rally as evidence that President Trump’s economic policies are working.

The professors respond to this debate by arguing that it can’t be resolved theoretically. As they write in the study: “How much the stock market reflects the economy is an empirical question.”

They focus on several measures, but perhaps the easiest to understand is the proportion of total employment that comes from public companies. At the start of the professors’ sample in the early 1970s, 41.4% of non-farm workers in the private sector were employed by publicly traded corporations. In 2019, this had fallen to 29.0%.

Notice that even in the early 1970s less than half of non-farm private employment in the U.S. came from publicly traded companies, and that this proportion has declined only modestly since then. So the stock market-economy disconnect is not entirely a new phenomenon.

This conclusion was reinforced by what the professors found upon digging into the data more deeply: The long-term trend toward a greater disconnect has not followed a straight line. In fact, they found that the current disconnect is not even the highest it’s been over the last 50 years.

Consider an “employment unrepresentativeness measure” that the professors created, which reflects the degree to which a company’s market capitalization share of the total market differs from its share of total employment. This measure would be low if the publicly traded company that employed the most people also had the greatest market cap, and so on down the line. Higher readings therefore would indicate greater “unrepresentativeness” — a greater disconnect, in other words.

The chart at the top of this article plots the professors’ employment unrepresentativeness measure. Notice that while the current reading is higher than in the 1970s, it isn’t as high as what was registered at the top of the internet bubble.

There are both shorter-term and long-term factors at work here, according to the professors. The shorter-term factor is the market’s valuation: The stock market-economy disconnect increases as valuations become more stretched. This is an ominous finding, given that their employment unrepresentativeness measure is now higher than at any other time except the top of the internet bubble.

The longer-term factor, according to the professors, is the shift away from manufacturing toward a high-tech economy. As a general rule, high-tech companies employ fewer people than do manufacturers. The company currently at the top of the market-cap ranking—Apple (AAPL) — has 137,000 employees, according to FactSet. In contrast, when General Motors (GM) was at the top of the market-cap rankings five decades ago, it employed more than 600,000 people.

The bottom line: There is a widening stock market-economy disconnect. Stock-market strength tells us less about the true state of the economy than at almost any other time over the last five decades. And that’s 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 fee to be audited. He can be reached at

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