If the US Economy is strong, why is the US Stock Market so far down.
The Dow Jones Industrial Average plunged more than 1,000 points this week and we have now officially experienced a “correction” in the market (more than 10% drop). We’ve been talking about this for some time and as always with these types of situations, most people thought the market would drop eventually, but it wasn’t clear when.
Well, it’s now clear – when is now.
So, you might wonder why, when we hear about the strong US economy, the stock market is plunging.
And certainly the US economy is roaring. The trump tax cuts have accelerated the economy with GDP growth above 4% (we are used to numbers around 2%), unemployment is at historic lows, interest rates are still relatively low (although not as low as they once were) and inflation remains relatively low as well.
So, with all this strength, why is the market plunging? The answer is that markets reflect future expectations and rise and fall when future expectations change. When you hear about a company releasing an earnings report and that stock rising or falling, it isn’t because investors are rewarding or punishing a company for that quarters performance, it is because investors are using the earnings data to make a prediction on how well that company will do in the future. That’s why earnings can beat expectations but the stock can still go down – there is often something in the report that makes investors nervous about the future for the company.
So, markets reflect future expectations of all companies and the economy as a whole and there is growing consensus that the great bull market we’ve been experiencing is coming to an end. In other words, investors are betting that the FUTURE economy is going to struggle and they are pricing those struggles into the price of stocks.
So, when you hear about the market rising or falling, remember that these changes have to do with how investors are thinking about the future – not the past or the present.
While markets are cyclical and we are due for a bear market and a softening of the economy - let's hope the cycle doesn't repeat this time!