We have been programmed, or at the least unintentionally misled, into believing that the stock market is a good measure of how the economy is doing. We hear it in passing in the news everyday: “The Stock Market closed down today on news that” something happened and because of that piece of information we think the economy is not doing well. This is not a good way to look at our economy particularly with our current economic crisis.
What do they mean by the “stock market”? The news sound bites about the stock market usually refer to one of three indices:
These indices are excellent measures of how the equity or stock market is doing but that is it. Contrary to what I was taught in business school the stock market is not rational. The stock market is nothing more than a place for people or entities to exchange something of value. The stock market is prone to whims and herd mentality. Stock values or prices are often not even based on balance sheet fundamentals. For instance, remember not to long ago - internet craze/bubble where some internet company stocks were reaching over $100 per share based on nothing more than idea that the internet will solve all of our problems. These internet companies had negative cash flows and were projecting no income for years but the stock market valued them at $150 per share.
Our current economic crisis is another reason why we cannot rely on the stock market as an economic indicator. First, according to the National Bureau of Economic Research our current recession official began in December 2007. But, the Dow Jones Industrial Average was hovering above 13,000 not far from its record 14,000 point mark. Today, the Dow Jones Industrial Average is at 7,000. Second, our current economic crisis began in the credit markets and truly is a crisis of credit (debt instruments) versus equity (stocks). If anything, we should be paying attention to credit market indicators to determine if our economy is improving. If this is too complicated then there are the more published indicators such gross national product (GNP) reports and unemployment rate reports (although often understates true unemployment).
economy financial+crisis budget+deficit obama unemployment jobs credit+cards debt social+security personal+finance capitalism deficit bailout mortgage mortgage+crisis economic+crisis wall+street+bailout new+economy job+guarantee retirement+savings credit+unions deficit+hawks economic+stimulus cooperatives income+inequality health+care+reform financial+regulatory+reform worker+cooperatives gdp federal+debt financial+conglomerates tarp financial+oligarchy 401k scams fiat+currency debt+management new+normal money consumer+debt investments china economic+growth wages federal+reserve globalization savings consumer+protection stimulus neoliberal unemployment+rate tax+cuts middle+class wall+street investing foreclosure budget financial+planning credit+card+debt debt+settlement federal+deficit democrats republicans stocks government+spending negative+equity risk modern+monetary+theory stock+market neo-liberal checking economic+policy u.s.+treasuries bonds economic+mobility job+growth bank+of+america foreclosure+fraud taxes consumer+spending cfpa ira inflation class+war jobs+report financial+bailout fiscal+policy evil pete+peterson health+care financial+literacy jobs+crisis foreclosures move+your+money full+employment auto+industry president+obama gold+standard debt+ceiling center+for+responsible+lending mutual+funds innocent+fraud aig life+insurance personal+income trade+deficit market+fundamentalism consumer+financial+protection+agency cash+flow banking identity+theft fraud compound+interest too+big+to+fail predatory fdic state+of+the+union u.s.+treasury+securities net+worth class+warfare bankruptcy derivatives goldman+sachs mortgages debt+consolidation eu great+recession gold keynes refinance fico+scores debt+crisis credit+scores real+estate mortgage+foreclosure financial+regulation banking+system federal+budget de-regulation financial+crisis+inquiry+commission deficit+commission debt+servitude krugman free+trade solidarity wisconsin income+tax refinancing debt+collection loan+modifications financial+stability+plan poverty trickle+down+economics working+class retirement currency wills economics #finreg tbtf monthly+budget estate+planning consumer+credit disability+income+insurance scam fiscal+sustainability home+mortgage fixed+rate+annuity lobbyists debt+is+evil balance+check+book credit+report teach-in currency+manipulation bill+gross insurance variable+rate+annuity corporate+tax+breaks credit+card+law deficit+spending tina general+motors economic+indicators budgeting financialization warren+mosler washington+consensus foreclosure+rescue+services gross+domestic+product race+to+bottom big+banks marx june+jobs+report open+auction lost+decade financial+genocide republican+budget emergency new+capitalist+manifesto bank+fees credit+card minsky tips geithner commercial+real+estate direct+jobs+program civil+disobedience human+capital direct+deposit reaganomics overdraft cfpb galbraith social+security+cards personal+consumption treasuries protests balance etf economic+justice barack+obama worker+ownership wall+street+bailouts exports household+debt fallacy+of+composition gas+prices obama+administration destruction citizens+united outlays unemployment+benefits imports card+act fallacies securities+laws save public+option living+standard unions july+2011 laid+off citigroup financial+sector foreclosure+gate auto+loans emergency+funds deductibles strategic+defaults keynesian wiped+out productivity+ralph+nader new+era+windows money+market+accounts unemployment+insurance fox+news+channel human+capitalism savings+tip financial+reform arra free+credit+report chicago money+market+mutual+funds afl-cio fox move+money predatory+lending credit+rating+agencies credit+reports fallacy uaw employment principal+reduction roger+ailes close+banking+accounts countervailing+powers refund+anticipation+loans jobs+data moody's revolution tax+reform denmark propaganda banking+services john+k.+galbraith tax+refund debt+forgiveness lehman+brothers cornel+west exuberance disposable+income national+infrastructure+bank corporate+welfare u.s money+manager+capitalism birth+certificate monetary+policy option+arm mortgage+loan+modifications subprime+mortgages corporate+profits interest+rates greece quantitative+easing political+system fundamentals living+wage output+gap success consumption ltcm universal+health+care income+distribution household john+mccain minimum+wage new+democrat+coalition two+americas frontline senate+democrats eurozone debt+commission haymarket american+recovery+and+reinvestment+act oligarchy two+economies income regulations ben+bernanke california+budget catfood employee+ownership existing+home+sales jobless+recovery carried+interest john+edwards mark+to+market budgets payroll+tax euro chicago+idea paladino robert+reich gmac life+settlements tax+holiday ireland mlk fannie+mae housing+market cowards slavery dollar sector+balances target+date+mutual+funds argentina fierce subprime bad+bank bullshit phone+scams financial+regulations national+debt free+markets united+states now savings+plan alan+greenspan deficit+errorists payroll+tax+holiday time+value+of+money cost+of+unemployment ponzi+schemes swipe+fees savings+bonds shadow+banking+system fica+tax madison great+divergence paulson future+value pensions fed+audit debit+cards credit+markets fair+debt+collection+practices+act tax+code #wallstreetscam cash cdo walker warren+buffett treasury+department present+value tax+deal cooperative+economy predatory+home+lenders liquidity u.s.+debt poverty+rates conservatives ppip job+loss 20-year+mortgage obama+tax+deal short+sales cash+management treasury+securities detroit+schools home+buying economic+purgatory long+term+unemployment vicious+cycle bartering emergency+savings efca debt+hysteria home+closing banks deficit+hawk american+capitalism community+gardens economic community+banks debt+to+gdp recession austerity online+scams income+taxes investment inequality estate investment+yields happy+year finreg hyman+minsky american+dream email beige+book mortgage+modifications yuan risk-return investment+advice dot+com+bubble leading+economic+indicators malicious+software deflation corporate+bailouts federal business+roundtable cooperation returns housing+bubble chris+dodd lei deferred+annuities bailouts economic+policies balancing+checkbook alternatives