How reflexive is the economy to the stock market?

The Nasdaq is down 10.4% from the high just three weeks ago but when you zoom out, it’s more of a minor correction after an incredible rally.

If stocks can steady here, this episode will be quickly forgotten.

The problem is that we could see more selling and here is the case for it:

• AI has driven so much of the trade and a re-think in that could lead to heavy selling in the Mag 7
• The Fed isn’t likely to acquiesce to market pricing of 50 bps easily

I think we will see some kicking and screaming from the market before the Fed finally listens and that that point it will be even further behind the curve. I don’t see Fed officials being easily bullied by the fall in the stock market.

So what if the market falls further?

That’s when it gets interesting. More than ever, the stock market is the economy. A generation ago, the economy and the stock market were more separate but they’ve grown more closely aligned with an increasingly online and financialized economy.

I think the rally in the stock market in the past 20 months has been a tailwind for US growth but a retracement would be the opposite. Again, it’s going to take more than 10% in the Nasdaq (and probably more than 20%) but if that comes at the same time as job losses, it could spark a recessionary mindset that will be tough to overcome, especially at a time of US political angst.

This article was written by Adam Button at www.forexlive.com.