In the era of COVID-19, and the financial woes it has created, I often get asked, “Why is the stock market holding up so well when the economy appears to be struggling?”
To understand why the markets react — or don’t — to certain outside factors, it’s always good to keep in mind that the stock market is not the economy. I can’t stress this enough. We touched on this week’s volatility in yesterday’s market update.
The stock market is considered a “lead economic indicator,” meaning it’s anticipating what economic conditions will look like 6-9 months into the future. While it can sometimes be a tricky concept to grasp, remember that the stock market’s price today reflects potential future economic activity. 1
Another “lead economic indicator” is building permits. When there is an increase in building permits, it lets us know that developers are bullish about future home sales prospects. If building permits are down, it tells investors that builders may be concerned about interest rates and consumer confidence.2
Although helpful in general, lead indicators should never be seen as infallible. Abrupt and unexpected changes will prompt lead indicators to rapidly recalibrate their expectations for the future. Look no further than when COVID-19 grabbed the headlines in early March, which ended the stock market’s 11-year bull market.3,4
Keep in mind that in addition to lead indicators, there are lag indicators and coincident (real-time) indicators. We take all three types of indicators into account to help provide context for what can often seem counterintuitive behavior, especially in the face of intense global disruption.
For more reading on economic indicators, feel free to check out an earlier blog post on market behavior.
Let me know if you’d like to chat about market behavior, economy or any other topics you’re pondering. A dedicated professional at Epic Capital is here to help.
Recently, you may have seen reports that a record-low number of homes are available for sale—roughly 1.03 million nationwide. If you compare that to the average number of homes for sale during the past 10 years, it’s no surprise that many hopeful homebuyers are having issues securing a home. But why exactly is the housing … Continue reading “Forces Driving the Housing Market”
It can be exhausting trying to keep up with the whims of Wall Street. Lately, the financial markets have been fixated on federal taxes and what may be proposed on Capitol Hill in the weeks and months ahead. Wall Street’s focus on taxes closely follows its attention on the 10-year Treasury yield. And it wasn’t … Continue reading “The Whims of Wall Street”
President Joe Biden introduced the much-anticipated American Jobs Plan, which outlines an approach to spend roughly $2.2 trillion on the nation’s infrastructure and other projects. As part of the legislative process, the Biden administration also laid out a proposal for paying for the domestic investment. The plan includes raising the corporate tax rate to 28% … Continue reading “Paying for the Infrastructure Bill”
Financially, many of us associate the spring with taxes – but we should also associate December with important IRA deadlines. This year, like 2020, will see a few changes and distinctions. December 31, 2021, is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.
There’s an old Wall Street maxim that says, “markets climb a wall of worry.” And these days, there’s plenty to worry about with the trend in long-term interest rates and bonds.
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