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Is the Stock Market a Leading Indicator?

Most economists will tell you that one of the most looked to indicators of the future economy is the stock market. There are others like housing starts, inventories and bond yields. In the last 3 months all these indicators have been positive. That is the first time that happened since 2004. Hello? Is anyone noticing this stuff? Someone posted a comment on Marketwatch.com saying, “The 10 day pump in the market indices is as bogus as a $3 bill.” Forget the fact that earnings reports have been positive (especially Apple which astounded experts after the market closed today…let’s see what happens tomorrow) and some economists are actually beginning to say there are signs that we may have started the beginning of the end of the recession.

The market closed higher today than January 6. Will there be more dips in the market before it gets back to a high? Of course. Will they head us back down to the 6500 nadir reached in March? No clue, but everyone I talk to thinks not. Then again, those who can always predict the stock market correctly should be getting fanned on their own island, and they’re not.

It is true that the regular rules for when recession ends may not fully apply here. The downturn has so dramatically affected every single sector of the economy like none I’ve seen in the almost 30 years I’ve been in the market. But….it’s starting to get better in some sectors, less bad in others. The lagging indicators like unemployment will continue  to rise, as they will reflect what happened a few months ago.

If nothing else, a rising stock market makes people feel better, like they have more, even if just on paper, and that might trigger a little spending which will multiply and help the economy. Also as profits are taken people make actual real money, which is even better. I keep getting back to that old canard – expectations. When our expectations are that things will get better, that very feeling helps things actually get better. Probably your therapist will tell you that works in other places too. So yes, Virginia, I think the stock market is indeed a leading indicator now and is giving us a real signal that things will get better, hopefully sooner than later.