With so much data and news flooding our screens and ears we often misinterpret what it all means. The stock market is but one indicator of the economy. Over time, it has become a pretty accurate one and often foretells what is likely to occur in the economy. The stock market is a discounting mechanism, discounting prices into the future based on trends, patterns, relationships and certain economic data.
The stock market and economy are not generally mutually exclusive. The stock market is not the economy, rather it is one data point that indicates how the economy is doing and may perform down the road.
But in this micro world of trading and investing we tend to blur the relationship in to one giant morass. The economy, simply put is the wealth of a country in terms of production and consumption of goods and services. We measure the performance of the economy using various tools like unemployment trends, manufacturing, production, housing cycles, bank loans, trade and deficits.
There are many more but these are the core data points in determining the health of the economy. The stock market looks at the data and makes a determination of what the economy may look like down the road. It's more of a predictive tool, usually six to eight months out. As stated earlier, it is a very accurate predictive model.
Macro trends are important to follow and guide us when the economy turns. There are always boom and bust cycles in the economy. The stock market reflects these trends with bull and bear markets, they precede times of prosperity and difficulty in the economy. Over longer periods of time, bear markets are short but can be quite painful, yet offer up good buying opportunities if you're prepared.
Bull markets tend to run much longer in duration. At least here in the U.S., strong productivity, low unemployment, manufacturing and growth symbolize the market system of capitalism. The economic engine of the U.S. is about delivering prosperity, growth and the opportunity for liberty and freedom. Starting new businesses and being rewarded is the American Way.
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