Why Stocks Keep Rallying When the Economy is Tanking

Bad news on the American economy keeps popping up everywhere we look. If it’s not the housing market, the subprime mess, the spiraling deficit, the widening trade deficit… it is the sheer number of job losses the U.S. is now starting to experience.

But why do stocks keep rallying amid an economy headed for recession?

It’s an illusion my dear friend. Yes, we hear about the Dow Jones moving to new highs now and then… but new highs from what?

From its peak in 2000, the Dow Jones Industrial Average has risen in value by 1.7% per annum for the past seven years. Hardly a return to get excited about — especially if you take inflation into account. As for the S&P 500, the index is at about the same level it was in 2000. And the NASDAQ is still down 50% from its peak in 2000.

So the answer my dear friends is that while it seems (or, rephrased, Wall Street would like us to think) that stocks have been rising amid a wall-of-worry over the economy, the big stock market indices have gone nowhere in the past seven years. In fact, some of the major stock market indices are actually still below their level of 2000 when inflation is brought into the picture.

The biggest gains from stocks over the past few years have come from stock markets outside the U.S. The S&P/TSX Composite (Canada’s main stock index) has gone up 100% over the past five years. The S&P/TSX Composite is full of resource and precious metal stocks — all which have fared well in the past five years.

Where do I see the gains continuing to come from in stocks? Not from U.S. stocks. I see the big profits continuing to come from stocks outside the U.S. I have been recommending that my readers take positions in Canadian stocks for years… and I still see this as a prudent financial move especially for Americans who can gain from a falling U.S. currency.