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The Market is NOT an Indicator of Economic Health
This is my site Written by Neil Palmquist on April 17, 2013 – 7:04 am

The Market is not an indicator of economic health. I suggest that it is better, or at least safer… to think of “the market” as an indicator of the health of an index of companies. Why draw a comparative difference? It is common to refer to the health of the economy in reference to “the market”. However, as high as “the market” may be rising, the economy is not healthy, as is easily reflected in our continued unemployment and consumer confidence levels.

Perhaps you have heard that some argue that the market is at odds with consumers as to the health of the economy. I, however, disagree that they are at odds at all.  Consumers recognize that the economy isn’t healthy. They see that their dollar buys them less, that they are earning less, that it is difficult to get financing, and that their children’s future looks less bright. Business, it is important to note, and the economy however, are creations of man… and as creations of man they are subject to the same laws of nature as man. These tough times have thinned the herd of the unhealthy and mismanaged. It has forced companies to streamline, tighten management and focus on becoming short-term profit machines just to survive. The market is reflecting these improved and strong healthy companies in their stock prices, which in turn raises the indexes overall. So, the markets rise, but correlation is not causation… and therefore not necessarily due to an improved economic foundation.

One key sector that generally thrives in a growing economy, retail, continues to suffer, as despite the improvements in operations and efficiencies that the individual companies have implemented, their stock prices and health are much more strongly based on sales here at home than abroad.

Watching the market and its leaps and pullbacks, it seems much more hinged to the words and actions of the Fed than that of any underlying strengthening of the economy. Seemingly, as long as the Fed is willing to continue its excessive money printing, “quantitative easing”, and policy of holding low interest rates, the market can climb, but that is not an indicator of an improving economic climate. A household that can borrow indefinitely can spend indefinitely and enjoy a wonderful period… However, the reality is that no household, or country, can follow that formula forever… and that each day it behaves as if it can, it digs a deeper hole from which it will eventually have to climb out of. In short, while the market is reaping the benefits of government policy, the foundations from which a true economic recovery could even happen are being further and further eroded from said policies.

It seems that many an economist has forgotten the lessons of what happened to Germany in 1923. Most will recall that Germany suffered extreme hyper-inflation due to their money printing policies. However, an important economic comparable I would ask you all to stay mindful of is that prior to the onset of inflation, Germany enjoyed a golden period of “seemingly” amazing economic growth and unemployment levels of only 1%. Obviously, the economy was anything but healthy… “the market” and people just didn’t know it.

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