Regarding the question raised by today’s headline, “Do Stocks Reflect The Economy?” -- the one-word answer is NO. The cornerstone of conventional economic wisdom is pure baloney.
And, nothing set this record straight like the week ending on April 18, 2008. A hail of bad news fired into Wall Street, which left the following bullet holes:
- Political unrest in Nigeria erupts into sabotage of oil pipelines.
- Crude oil futures rocket 6.2% on the week to end at a record $117 per barrel.
- A Commerce Department report reveals “truly calamitous” housing data, such as: a 57% increase in foreclosures since last March, and an 11.9% drop in housing starts (to a 17-year low).
- Gasoline prices at the pump surge 16 cents in two weeks.
- The world’s largest investment bank Citigroup Inc. reveals a 48% plunge in first-quarter revenue, alongside write-down losses totaling $12 billion.
- And lastly, according to one popular news source, financial trouble at government-backed lenders Fannie Mae and Freddie Mac “could cause the U.S. to lose its sterling triple-A rating.” (DJ MarketWatch)
Repeat: The next big downgrade may not be of a lending agent, but rather, the leader of the free world.
Yet, in the midst of this, the Dow Jones Industrial Average finished the week at its highest level in three months. The mainstream media is so married to the idea that economic news drives stock prices that it stays loyal even at the cost of sounding ridiculous. Case in point, this April 18 Bloomberg headline: “Stocks Jump On Citigroup…”
They may as well have said: Stocks Jump On An Open Elevator Shaft.
Needless to say, this is not an isolated incident. In 2002, Robert Prechter Jr. addressed the fallacy of a news-driven market in his best-selling book Conquer The Crash. In the opening chapter “Myth Exposed,” readers take in the following examples:
“Roaring Twenties” (1921 to 1929): A “New Era” of economic growth was supposedly in place. YET, while the stock market enjoyed a greater percentage rise than at any equivalent time in U.S. history -- the annual inflation adjusted Gross National Product was LESS THAN it was during the previous bull market, from 1898 to 1906.
“Japanese Miracle” (1975 to 1989): The Nikkei enjoys a record-breaking boom YET real Gross Domestic Product is weaker than during the preceding uptrend (1955 to 1973).
“New Economy” (late 1990s): From 1974 to 2000, the U.S. stock market soared a jaw dropping 1,930% -- versus a 971% gain during the prior long-term wave up (1942 to 1966). YET, by the top 13 measures of economic growth, this raging bull was demonstrably weaker than the prior period of expansion.
Bottom line: In the final stage of a bull market in stocks, the economic trend will lag both in terms of time and performance. As the bull market morphs into a mania driven by hopes and dreams instead of brains and muscle, the visibly weaker and lagging economic fundamentals show the mania for what it is.
In the end, history makes one guarantee: The economy defines the message that was already sent by the stock market.
The economy-driven market fallacy is just one of the many groundbreaking revelations of Conquer the Crash. Read all about how to emerge safe from the current storm with your own copy today.