The Simple and Real Meaning of the Stock Market

The headlines in the major financial newspapers last week were all concentrated on one theme: Inflation. Some typical headlines: “Inflation Fears Rattle Stocks,” “Stocks Take Hit As Fed Worries About Inflation,” and “Inflation Jitters Hit Stocks.” Reporters were all saying the same thing: Inflation was to blame for the poor performance of stocks.

While many financial reporters and investment analysts spend time trying to pinpoint market action on a particular piece of news, they are missing the point. Sure, it’s easy to say inflation is higher than the Fed would like and that could cause interest rates to rise, leading to lower stock prices. Or, other days, it could be the reverse. Analysts could be saying stocks are rising because it looks like interest rate hikes are over.

My theory on why stocks go up and down is different. I always believe stocks are a leading indicator. Sure, the Dow Jones Industrial Average will have sharp daily gains or losses depending on investors’ fear or greed that particular day. But, we must not lose sight of the fact the stock market is a leading indicator.

Inflation figures released today tell us what happened last month, or at some other point in history. The same is true with most economic numbers such as housing starts, GDP growth, manufacturing activity–they are lagging indicators, telling us what happened in the past. They are still important numbers, however, to look at because often we can spot a trend in these usually government-released figures.

But, the stock market is a leading indicator. It’s a simple concept that most investors fail to retain: The action of the stock market today tells us what’s going to happen economically six to 12 months down the road. But enough with the theory: What’s happening now?

In my opinion, with the Dow Jones Industrial Average not breaking above its record high set six long years ago, I believe the stock market is telling us the big economic picture down the road is not as bright as it was in the past. On the other hand, if the major stock indices were breaking to new highs, I’d say the market sees something in the economic future it likes.

Sure, analysts will tell you the 6% hit the Dow Jones Industrial Average took in the past few weeks was a healthy correction, I’ll tell you the opposite: We are still in a bear market in big cap and big blue chips stocks… a bear market that started in the year 2000… a bear market because the stock market sees a much weaker economy in the months ahead. It really is that simple.