When it comes to the question of whether the economy affects the stock market, it’s not about whether the former is in a good or bad state, but how that relates to what the market was expecting. In today’s episode we get into predictions about labour economics during COVID-19, the relationship between the market and the economy, and how to make decisions that suit your risk tolerance. We kick things off by reviewing insights Edward Lazear and Gerard O’Reilly gave in a recent webinar. They spoke about how the current crisis relates to past events from the perspective of labour economics, and what empirical data is saying about stock returns and the economy. A talking point here is the idea that recessions are defined by committees, and always long after they have either begun or ended. This leads to the topic of whether there is a relationship between economic data and stock market performance. We find many examples of cases in the short and long term where no correlation can be found between the two, and cases where the market starts to recover before the economy. We discuss how this speaks of a fundamental difference in the analytical methods of economists versus investors, not a rigged market. The first group assesses past information while the second invests based on where they think things will go. We talk about what happens when GDP is good but not as high as expectations were, and how per-share earnings growth can only keep up with GDP if no new shares were issued. We then switch to the concept of risk aversion and discuss the differences between system one and system two thinking, before moving into a comparison between two methods of analyzing risk. Tune in for your weekly reality check! Key Points From This Episode: 21:51 Gerard O’Reilly’s observations about financial markets in recession; Lazear’s stabilization predictions, and why inflation isn’t a threat in slack markets; State Street’s ETF rebalance and failed hedge fund rebalancing bets . 33:30 Forward-thinking markets vs backward thinking economies; Market expectations and the effect economic news has on future stock prices. 43:44 How component-based vs automatically rebalanced portfolios are faring; Why yield curve inversions forecast economic activity but not equity premiums. 54:00 Slippage: per-share earnings growth can only keep up with GDP if no new shares get re-issued; How efficient the market is in pricing new information. 1:02:41 Determining risk tolerance; Why using a GMO point is more effective than psychometric risk profiling; The dollar terms and percentage terms shown on the Riskalyze risk slider. 1:15:36 Bad advice of the week! Rebalancing your portfolios. Books From Today’s Episode: Science of Fear — https://amzn.to/2B1YWIw Stumbling on Happiness — https://amzn.to/3fNkJ5x How Not to Die — https://amzn.to/3dlrNok Links From Today’s Episode: Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website - https://rationalreminder.ca/podcast/94 Ozark on Netflix — https://www.netflix.com/us/title/80117552 How to Fix a Drug Scandal on Netflix — https://www.netflix.com/us/title/80233339 Ronda Rousey Story on Netflix — https://www.netflix.com/us/title/80168034 Dimensional Edward Lazear Webinar — https://us.dimensional.com/perspectives/update-with-ed-lazear Gerard O’Reilly — https://us.dimensional.com/about-us/media-center/gerard-oreilly-featured-in-financial-times ‘Quarterly Shake-Up for World’s Biggest ETF Delayed Until June’ — https://www.bloomberg.com/news/articles/2020-04-09/state-street-delays-shaking-up-world-s-biggest-etf-on-volatility ‘Hedge Funds Suffered Losses as Index Rebalancing Trade Went Awry’ — https://www.forbes.com/sites/nathanvardi/2020/03/27/hedge-funds-suffered-losses-as-index-rebalancing-trade-went-awry/#77c071c14218 ‘Inverted Yield Curves and Expected Stock Returns’ — https://famafrench.dimensional.com/media/467645/inverted-yield-curves-and-expected-stock-returns-july-28-2019.pdf ‘Is Economic Growth Good for Investors?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2161183 ‘Earnings Growth: The Two Percent Dilution’ — https://www.researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf ‘Experimental measures: Eliciting risk preferences’ — https://www.sciencedirect.com/science/article/abs/pii/S016726811200282X The Rational Reminder is presented as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The funds and portfolios discussed are examples only and may not be appropriate for your individual circumstances.