RebelCapitalist: Financial Information for the Rest of Us | Stock Market Rally Does Not Equal Economic Growth

Stock Market Rally Does Not Equal Economic Growth

Oct 20, 2009 | By: Mr_Blue | Tags: economy, stock market

We are experiencing a mini-rally in the stock market. This is good for our retirement accounts and other accounts tied to the stock market. But this can all change very easily in the opposite direction because of the volatile nature of the stock market. The important thing to understand is that a stock market rally does not necessarily translate into a better economy.

Here is a graph showing the Dow Jones Industrial Average since the beginning of this year:

The DJIA is currently around 10,000. It hit 14,000 in the 4th quarter of 2007.

Many people talk about the virtues of the predictive quality of the stock market. The stock market is not some inanimate machine. People operate in the stock market with various imperfections, perceptions and beliefs - far from perfect. It is also very prone to a herd mentality, bubbles and shocks - so it’s very far from perfect as a predictor of our economic future. Besides, if it was such a great predictor why didn’t the stock market figure out the internet stock bubble and our current economic crisis. It didn’t because the participants were caught up in all euphoria related to the internet and the housing market. People ignored the signals that were present

Our economy is complex and there are many indicators to look at to determine the health of our economy. The stock market with its imperfections is just ONE of the indicators to look. There are many other such as unemployment, household debt levels and consumer spending. The point is that it’s nice that the stock market is rallying but that doesn’t mean that a REAL economic recovery is coming any time soon.

Good luck.