I’ve always believed the stock market to be a leading indicator of what lies ahead six to 12 months from now, based on historical events. If stocks are rallying ahead (like they did in late 1990s), good times are ahead (like we experienced from 2000 to 2005). If stocks are falling fast for no good reason (late 1920s), problems lie ahead (depression of early 1930s).
The stock market to me, especially the action of the Dow Jones Industrial Average, is the best leading indicator in existence today of where we are headed economically… for good times, sideways economic growth, or for bad times.
In my opinion, today’s stocks are at a critical point in history. Here’s why:
Finally, after six years, the Dow Jones Industrial Average is back up where it was in early 2000. Old market watchers like me know two things could be happening here: Stocks could either be forming a huge top which will be in place for years to come or stocks could decisively break-out on the upside.
What does this mean to your wealth and the economy?
If stocks form a huge top that means, as a leading indicator, the stock market is saying the economy has topped out… the economic picture ahead is not that great… after years of consumer “economic” happiness, bad times are ahead for us.
If, on the other hand, stocks move decisively ahead (and by that, we’re talking about the Dow Jones moving close to the 13,000 level), then the stock market is telling us we’ve been worrying all this time for nothing. The market would be telling us the Fed has done a great job lowering and raising interest rates to provide steady economic growth… and that the economy will continue expanding along.
Should the first scenario develop, and that’s where my guess is, then the bear has finished the job he set out to accomplish: Make investors feel, after six long years, that the bear market in stocks is over… then take it away from them again. I’ll keep you posted on how this very important story actually plays out over the next few months.