I bet you hear on TV how the market “looks forward.” When it is going down the market is telling us that tough times in the economy are coming, and when it is going up it tells us that things for the economy are looking up.
This is a myth.
Here is the proof. What was the market telling us at 14,000 on the DOW? It was hitting all time highs so by the pundits logic it would mean that the economy was looking good going forward. Uh Oh!
What happened next was a precipitous drop to well below 7,000 on the DOW and the worst recession (depression) than most have seen in their lifetimes. So, how prescient was the market at 14,000 exactly?
There are many examples of this, but this is the latest that everyone saw.
Here is the truth. In the short to medium term, the stock market has almost nothing to do with the real economy at all. It can go up and down violently with no real correlation to REAL economic strength or weakness. There are countless reasons why this happens and of course you can pick out individual stocks that have their own unique story.
Sometimes the market is accurate in forecasting the future and sometimes it isn’t. It all depends on a variety of factors so each case has to be looked at separately. Just know that the market as a forward looking indicator is not always a good barometer of current or future economic strength.
Tags: Capitalist, Economy, Investing