Life is full of perceptions that appear to be counter intuitive. The falling rate of an object does not depend on its mass. Sailing into the wind propels sailboats to move forward. Drinking water does not cool the effect of spicy food. So it is also true about rising markets in the midst of economic turmoil.
How can the market keep going up when the economy is so bad?
This is a question I hear from many of you and it’s not an unreasonable one. A number of factors impact the price of stocks and although the market and the economy are related, they are not the same.
My favorite illustration about the relationship between the market and the economy can be expressed like this: Every day you take your dog out for a walk. If you are like most dog-walkers, you follow a well-trodden path. You and your dog are both moving in the same general direction but the dog is wandering all over the place. The dog, of course, represents the market, while you represent the economy.
The market and the economy represent different points of view.
The market looks to the future and the economy is about the past and present. Markets are predictive. Economic indicators by their very nature, are derived from the past. Recessions are confirmed by two consecutive quarters that have a decline in GDP, for example. Whereas, stock pricing is based on what investors expect profits to be years down the road.
Looking at the way the market reacted during the Great Recession is a clear example of this. In 2009, although the market bottom was reached in March, the unemployment rate didn’t peak until October. That year the market was up 29%. The opposite was true in 2018 which was great economically, but saw a market decline of 5%.
All of this just demonstrates the confusion as well as the futility of trying to time the market. Staying the course with your investments is the best approach and soundest advice. Just be sure you are set on the right course. If you have doubts, we are here to help.
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