Stock Market as an economic indicator

[Havax]

Can someone tell me in layman's terms why the stock market isn't a good evaluation of how the economy is doing? Sick of seeing my friends get excited about the stock market rising and thinking the economy is "coming back".

[Acala]

The stock market in Zimbabwe made spectacular gains nominally, just before the currency collapsed. So, number one, stock prices must be tempered against loss in value of the currency in which they are expressed.

Number two, hikes in stock prices that are not built on increased productivity or profitability of the underlying businesses are based on speculation and.or Central Bank pumping.

Number three, the stock market tends to reflect the national, corporate economy and ignores the local, small-business economy, which is a huge componenet of the economy that creates jobs for the middle class.

Number four, corporate profits are sometimes due to the Romney maneuver - taking over a corporation and stripping it down to create the appearance of short term gains for a quick turnaround at the expense of long-term prospects. This is especially true in hard economic times when legitimate profits are hard to generate.

[Zippyjuan]

The price of stocks are normally based on the expected future value of a company- not necessariliy what it is worth at this time. If stocks are rising, then the expectation is that the economy will be growing in the future.

There is also the concept of a "wealth effect" where people who own stocks and see the price of stocks they own rising feel they have more wealth (even though they don't actually have that wealth until they sell the stocks) and that can lead them to spend more money than they would if stocks were flat or falling.

[thoughtomator]

stock market valuations these days are based on leverage and the amount that a company can lie about their financial position and get away with it, with some implied government backstop in the mix - it's also been on inverse correlation with the US dollar for quite some time - depreciate the currency, inflate the asset values is the name of the game

[FreedomProsperityPeace]

Back in July of 2007, when the economic crisis first hit, the stock market fell by about 600 points in a week. By October, it was back up to record highs above 14,000 on the Dow. We all know what happened after that. So, we had all these fools piling back into the market even given what we were facing. If that isn't rock-solid proof that the market is a terrible indicator, I don't know what is.

http://chart.finance.yahoo.com/z?s=%5eDJI&t=5y&q=l&l=on&z=l&a=v&p=s&lang=en-US&region=US

If you had money left to invest at the bottom of the crash, you made a lot of money in the last few years, but we're only setting ourselves up to crash again from what I'm seeing. This "recovery" has been fueled by easy money, the same thing that got us into this mess. Only this time, we have a few trillion more in debt with no signs of slowing down the spending. The U.S. and Europe are both facing a debt crisis, with runaway inflation as a headwind to any real recovery.

[FreedomProsperityPeace]

Here's Cramer on CNBC, screaming about Armageddon in August of 2007. Nobody listened to him and they drove the market above 14000 anyway. There were tons of articles warning about the housing bubble in '04, '05, '06, and nobody listened to that before the crisis hit.


http://www.youtube.com/watch?v=SWksEJQEYVU