How Does The Economy Affect The Stock Market?

What Is The Correlation Between The Economy And The Stock Market?

economy and the stock marketMost Investors will recognize, that over time, the economy will typically direct the stock market.  However, over shorter periods of time, the correlation can actually be weak or inverse, which can be very confusing for investors trying to predict the motion of the markets.  Common investor questions include:  “How can stocks go up when the economy just stinks?” or “How can stocks go down when the economy is roaring?”  In more recent years, investors have been astonished by the performance of the stock market in spite of the sluggish economy.  Since 2009, when the “recovery” began in the U.S. the economic growth has averaged only 2.15, whereas the stock market is up a whopping 150% during the same time frame.

Stocks Predict The Future Of The Economy

One thing that help sheds light on the disparity between stock market performance and economic performance, is that stocks are a leading indicator of the economy.  Meaning, when the stock market is performing well in spite of a sluggish economy, it actually could mean that the economy will be doing well in the future.  In 2009 when everyone was stuck in a financial rut, it was hard to see the forest through the trees.  Stocks, on the other hand, predicted better days ahead by starting their upward trend.  Conversely, in Spring of 2000, everyone was thrilled with the economic performance, and yet the stock market started their downward climb.  The market accurately was predicting the financial crisis that occurred later in the decade.  In light of this, it is important not to live and die by the economic performance of the here and now, to predict the immediate performance of the markets.  In doing so, you will almost always set yourself up for failure.

Don’t Assume Economic Growth Is An Indicator Of The Stock Market

Don’t make the mistake that so many investors do, by assuming that economic growth is a leading indicator of the stock market.  Instead, it’s better to take the approach that the stock market and the economy, while not joined at the hip, are actually loosely tethered by a fairly long rope.  The tether keeps them connected, but gives them the freedom to go their own way over shorter periods of time.  Thus, when making important investment decisions it’s wise to consult with a financial advisor whose job is to keep an eye on key market indicators and market performance, to help direct your assets into high performing asset classes given current market indicators.  For more information on market performance and on predicting the ebb and flow of the stock market, speak to a Redhawk Financial Advisor near you today. 

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