Why the Share Market is Not the Same as the Economy

It’s easy to assume that when the economy is doing badly, the share market must be struggling too. After all, if people are spending less and businesses are under pressure, shouldn’t that be reflected in share prices?

But in reality, the share market and the economy don’t always move in the same direction. In fact, they often behave quite differently.

A good example of this happened in early 2022. Australia was facing rising interest rates, higher inflation, and concerns about a possible recession. Many people expected the share market to fall sharply.

Yet, history shows us that the share market doesn’t always fall during tough economic times. In fact, during the past nine Australian recessions, the share market often performed surprisingly well. For instance, 1983 was one of the worst years for the economy and was one of the best years ever for the Australian share market, which rose by over 60%.

So, what’s going on? Why does the share market sometimes rise even when the economy is struggling?

To understand this, it helps to look at four key differences between the share market and the economy.

1. The Share Market Is Driven by Expectations

The share market doesn’t wait for official news or economic reports. It’s forward-looking. That means investors are constantly trying to predict what will happen next, not what’s happening right now.

There’s an old saying: “Buy the rumour, sell the news.” This captures the idea that investors act quickly on what they think is coming, rather than waiting for confirmation.

For example, when there are signs that the economy might slow down, the market often falls before the slowdown even begins. And by the time a recession is officially announced, the market may already be on the way back up.

Why? Because investors are always thinking ahead. Once a downturn is underway, they begin focusing on what comes next, like a potential recovery, interest rate cuts, or government stimulus. This means that markets can rise during a recession, long before any real signs of improvement show up in the broader economy.

2. The Share Market Reflects Investor Sentiment, Not Consumer Behaviour

While the economy is often shaped by everyday consumer habits, the share market is more influenced by how investors feel about the future.

When consumers are worried about rising prices, job security, or interest rates they often spend less. They might delay a holiday, eat out less, or hold off on buying a new car. This cautious behaviour slows down economic activity.

But investors don’t always see this as a bad thing. In fact, professional investors may view economic slowdowns as an opportunity. When markets fall, some see it as a chance to buy shares at lower prices, especially in companies they believe will do well in the long term.

Investors also pay attention to broader trends, like government policies, interest rate forecasts, or global events, and they use this information to make decisions based on future potential rather than current consumer confidence.

In short, the share market reflects what investors believe will happen next not what people are doing today.

3. The Share Market Is Made Up of Big Companies—The Economy Is Not

Another important difference is what each one includes.

The share market is made up of large, publicly listed companies, think of names like BHP, Woolworths, or CBA. These businesses are often well-established, globally connected, and have the ability to adapt to change quickly.

In contrast, the economy includes everything from massive corporations to local cafes, family-run shops, tradespeople, and gig workers. It also includes government spending, household budgets, and small business activity.

So, while the economy can be dragged down by struggling small businesses or rising living costs, the large companies in the share market may still be thriving. They might be expanding into overseas markets, cutting costs, or benefiting from rising prices in certain sectors like energy or mining.

Here’s an example: when the war in Ukraine began, energy prices surged. This was bad news for households and small businesses, who faced higher fuel and electricity bills. But it was good news for large oil and gas companies, whose profits rose thanks to those higher prices. As a result, their share prices went up even as many people in the economy were feeling the pinch.

This shows how large companies can benefit from events that hurt consumers or small businesses, leading to a disconnect between the share market and the broader economy.

4. The Share Market Is Focused on Profit—The Economy Is More Complex

The share market has a very clear goal: growth. Publicly listed companies are judged by their profits, and investors want to see those profits increase over time. If a company shows signs that it’s becoming more efficient or more profitable, its share price often goes up even if the economy as a whole is struggling.

The economy, on the other hand, is made up of many different groups with a variety of goals. These include:

• Governments, which may focus on employment, health, education, and infrastructure

• Households, which make decisions based on lifestyle, affordability, and financial stability

• Small businesses, which respond to local demand, labour markets, and costs

• Non-profits and community organisations, which may not seek profit at all

Let’s say a coal company discovers a new coal reserve. It may decide to open a mine if it sees a chance to generate profits. The government might approve it to boost employment and tax revenue. But the same government might also reject it if there are environmental concerns or strong public opposition. Individuals might support or oppose it based on their personal values or how the mine affects their local area.

This range of influences, political, social, environmental, and economic makes the economy complex and sometimes slow to react. Meanwhile, listed companies can move quickly to seize opportunities, reduce costs, or pivot their business models, which is often reflected in their share prices.

Why This Matters for Investors and the Public

Understanding the difference between the share market and the economy is important, especially when making financial decisions or trying to make sense of the news.

It’s easy to panic when you hear that the economy is in trouble. But that doesn’t automatically mean your superannuation balance or investment portfolio is going to fall. Likewise, when the share market is booming, it doesn’t always mean the economy is in great shape.

In fact, history shows us that market recoveries often begin while the economy still looks bleak. This was the case after the Global Financial Crisis in 2009, and again during the COVID-19 pandemic, when share markets rebounded even while lockdowns were still in place.

Keeping a cool head, staying informed, and thinking long-term can help people avoid making emotional decisions based on short-term headlines.

Summary

The share market and the economy are linked, but they are far from the same thing.

The share market is forward-looking, driven by expectations, and dominated by large companies aiming for profit. The economy is broader and more complex, reflecting the actions and experiences of governments, households, and businesses of all sizes.

Because of these differences, the share market can rise even when the economy is slowing—and fall even when things seem to be going well. Understanding this disconnect can help investors make better sense of the financial world.

While economic news can sometimes be alarming, it’s worth remembering that the share market often takes it’s own lead. And history has shown that long-term investors who stay patient and avoid panic often come out ahead.

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After working as an advisor for a decade, Joel founded Unified Wealth.

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