This article appeared in the July 2019 edition of Nevillewood Living.
When we think about the economy and the stock market, generally speaking, they are more like Ward and June Cleaver, the all American couple who never once quarreled on Leave It to Beaver. (Now we are really dating ourselves!). Most of the time, the health of the economy and performance of the stock market are in sync with one another. A growing economy, where firms are experiencing rising profits, will generally support a rising stock market. Conversely, anticipating lower profits, markets will usually fall in advance of a recession.
So, the two are usually as connected and agreeable as Ward and June. But not always. Stock prices occasionally fall because of an unwinding of speculative activity, or because of a change in market sentiment. And stocks can rise in the face of bad economic news just because prices were too cheap, or the market is seeing an economic recovery far out on the horizon. Occasionally, the tail wags the dog, as a rise or fall in the market can drive economic activity up or down by affecting consumer and business confidence, spending and investment.
So, where are we today?
The U.S. economy is certainly firing on all cylinders. Unemployment reached a fifty year low in April. GDP growth for the 1st quarter was 3.2%, the best 1st quarter gain since 2015, handily beating the forecasts. Judging by the stock market weakness in the fourth quarter of 2018, one would have thought that the economic data would have been terrible in 1Q 2019. Didn’t happen.
As we know, however, the market did recover very strongly to the upside in 1Q 2019, thus feeling like we were back on the set of Beaver. By mid-May, though the economic data remained very strong, the market jitters returned, and we were back to watching the Odd Couple.
Some of this is due to the fact that the market tends to focus more on the harder job of trying to predict the future, rather than aligning with the past. This accounts for the more erratic behavior that will often be observed in the market, vs the calmer and more consistent trends that we will see in the economic data. One famous economist has joked that “the market has accurately predicted nine out of the last five recessions.”
Back to the economy. Employment is strong. Monetary policy is still accommodative. Inflation is below Fed’s 2% target, which likely means interest rates will remain low. The one negative is the trade dispute with China, and the market continues to grapple with handicapping this situation.
In the long run, expect the market and the economy to act like a smiling Ward and June, but in the short run, we may see a bickering Felix and Oscar!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.