Why the Public Is Always Wrong About the Stock Market

Most of the newspapers we will read today will carry a “startling” story in their business sections about consumer confidence.

According to a Reuters and University of Michigan Survey of Consumers, consumer confidence in the U.S. fell in April for the third straight month. Most startling, consumer confidence is now at its lowest level in 26 years. We have to go back to March 1982, a time of extremely high inflation and interest rates, to see consumer confidence worse than what it is now.

What caught my attention about the report was the fact that nine in 10 consumers thought that the U.S. economy was in a recession at this time. The report also mentioned that never before had so many consumers heard so much poor economic news.

As a long-time market participant, it’s almost comical for me to see history repeating itself over and over again. What am I talking about?

When I predicted in mid-2007 that we would be in a recession in the U.S. by the first quarter of 2008, I was the only market forecaster making that call. In fact, back then, before the subprime mess became a banking crisis, the average American had no idea that times would get so difficult economically.

Today, it is the opposite: I’ve never seen such a well-publicized and well-known recession. The mood about the U.S. economy amongst Americans is down and outright grossly negative… they have the worse economic outlook for their country I have ever seen. But when the masses believe that the economy is going one way, it usually goes the other.

And you can see it in the stock market. While U.S consumer confidence sits at a 26-year low, the Dow Jones Industrial Average has risen an astonishing 1,383 points since mid-January 2008. Yes, while everyone is worried about the economy, the world’s most watched stock market is up 12% in just over three months.

While I follow the bad news like everyone else, the stock market is telling us that the public is wrong about the economy, as proven by rising stock prices. The public was wrong about the economy back in March 1982 because the economy just got better from there. And I truly believe that the public is wrong about the economy today. The stock market seems to have already discounted the worse ahead for the economy.