Stock market is not reflective of economy

The stock market, primarily the American ones have done quite well since March of 2009 when they were at their lowest point. It is easy to just look at how the Dow, NASDAQ, S&P 500 and even the TSX index for that matter are doing from time to time and assume that those numbers are reflective of the economy as a whole. In fact, even the pros do this sometimes and the non-business media are notorious for doing this on a regular basis, especially during this recession.

However, it is not always the correct way of looking at it. During uncertain times, like recessions and the early recoveries of recessions, the stock markets can be ahead or behind the actual economy. If you look at the 4 indices I mentioned above you will see that all of them have risen substantially over the last 7-8 months. Certainly, our economy is also stronger today than it was during March of last year, but it’s still far away from doubling in size like the S&P 500 is fairly close to doing.

Unfortunately, it is not that easy to determine how the economy is exactly doing because it is a very complex system. It is so complex that professional economists struggle with it and some have developed their own formulas for calculating it. If you are an investor, then the best way to do it is to not look at any one index or figure and act like that is the full story. Doing this will not only lead you to costly mistakes but, it will also drive you crazy because the data that comes out every day and week seems to contradict itself a lot of the time. This is not uncommon when an economy is pulling itself out of a recession and starting to enter a recovery as is hopefully the case now.

Stocks rise and fall more because of speculation and assumptions about the future of the particular company and the economy and not so much because of what is going on right now. Therefore, you need to look at the big picture and assess the general trend of the market and other data in the economy and don’t let yourself get too caught up on where a company or index closed on a particular day. If you have already purchased shares in certain companies or other financial instruments and you are not planning to buy or sell at this moment, then I would even suggest not following the tickers every day. I would not even look at how your shares did at the end of the trading day. I would look at them once a week or even longer because sometimes it is complete nonsense that causes movements up and down and in the long run that nonsense gets ironed out and it’s really the overall trajectory that determines whether or not you made a good investment.