What Does the Economy Have to Do with the Market?

[Timmy]

http://www.ritholtz.com/blog/2009/10/what-does-the-economy-have-to-do-with-the-market/

This is a good article, but very, very brief, that touches on the important point that the prices in the market can be quite disconnected from the state of the economy. I posted this in the Beginners Lounge as it is often beginners who are most beguiled by gurus in the current market claiming the economy is extremely weak (globally, not necessarily Australia) and therefore not to participate in the stock market (or worse, short it) ... even as the US stock market (for example) has undergone a massive rise.

From the article: Indeed, prices matter a great deal more to traders than theories or annoying things like "Objective Reality. To a trader, prices ARE the objective reality; to them economic theorists are peripheral players trying to rationalize reality.

The article says there will be more following, which I look forward to.

 

[Aussiejeff]

http://www.ritholtz.com/blog/2009/10/what-does-the-economy-have-to-do-with-the-market/

This is a good article, but very, very brief, that touches on the important point that the prices in the market can be quite disconnected from the state of the economy. I posted this in the Beginners Lounge as it is often beginners who are most beguiled by gurus in the current market claiming the economy is extremely weak (globally, not necessarily Australia) and therefore not to participate in the stock market (or worse, short it) ... even as the US stock market (for example) has undergone a massive rise.

From the article: Indeed, prices matter a great deal more to traders than theories or annoying things like "Objective Reality. To a trader, prices ARE the objective reality; to them economic theorists are peripheral players trying to rationalize reality.

The article says there will be more following, which I look forward to.

Absolutely agree.

Economies are a totally unnecessary distraction in Mr Market's endless pursuit of Mega-Wealth.

The sooner these faux-economies and their whining economist hangers-on bug*er off and let the real money movers strut their stuff, the better.

See? Even as the economic gloom 'n doomers throw more poisoned darts at the board,
Mr Market rises above their pointless barbs and posts a booming rise overnight.

Party on!!

 

[Agentm]

Absolutely agree.

Economies are a totally unnecessary distraction in Mr Market's endless pursuit of Mega-Wealth.

The sooner these faux-economies and their whining economist hangers-on bug*er off and let the real money movers strut their stuff, the better.

See? Even as the economic gloom 'n doomers throw more poisoned darts at the board,
Mr Market rises above their pointless barbs and posts a booming rise overnight.

Party on!!

lol

just as obama has not done anything to change what was discussed as wrong with the fundamentals, we can be assured the party will go on!!

bring on wealth and prosperity i say!!

 

[daisy]

Hi everybody,
I've got a niggling question I can't seem to find an answer. Maybe someone can help.
I actively invest bulk of money and swing trade a small portion ....as I get more experience...I'll probably increase this bit.
To me trading is technicals (and maybe a bit of a nod to fundamentals) while my investing is fundamentals with TA for timing.
Doing O.K. but interest rate rates get me confused.
On one hand I guess it means that our economy has a big tick but on the other hand if money costs more then it's bad for business?

 

[Timmy]

if money costs more then it's bad for business?

You are right Daisy, but remember the cost of money is only one input into business cost. There may be many other factors that are increasingly positive, well offsetting the cost of money (or, of course there may not be).

 

[Donga]

if money costs more then it's bad for business?

Another consideration is raised interest rates reflect RBA's confidence that the economy will continue to improve... which is good for business. So the general expectation would be that increased sales would more than compensate for additional interest costs.

 

[wayneL]

You gotta understand the dynamics.

Lowering rates is bullish because it makes financing cheaper, more for business's bottom line.

Holding rates steady is bullish because it means CBs have engineered a Goldilocks economy... not too cold, not too hot, just right.

Raising rates is bullish because it means our economy is strong.

It's only bearish when.... errr.... When IS it bearish?

 

[Temjin]

Because fundamental economic data are never fully reliable since it can be quite subjective depending on the person/organisation's perspective.

This is why some people prefer pure technical analysis and focus on the price/volume action only.

Of course, I'm not saying pure technical analysis is THE only way to go.

As usual, the market can become more irrational than you can stay solvent.

Has anyone actually asked the question who has been buying up the market lately?

If you search hard enough, you will find the cash INFLOW to equity funds FROM retail investors have actually dropped over the last few months. Whereas, the majority of the money was flowing in from managed funds, mostly hedge funds. Inside sellings have been on a record high as well.

So perhaps the typical mums/dads aren't that "irrational" after all? hehe

 

[Timmy]

It's only bearish when.... errr.... When IS it bearish?

When it is not bullish

 

[Timmy]

The article says there will be more following, which I look forward to.

OK, here is the next part of this article, with a nicely provocative title:
The Most Hated Rally in Wall Street History

And also a part 3:
Are Stocks Fully Valued?
I like this third article, mainly for the line: As noted previously, at times, things like "valuation" or the economy or earnings don't matter ”” until they suddenly do. My underlining and bolding.

The author is calling that the US equity rally is about half-way through, and therefore plenty of upside scope. So far in this rally there has been a huge preponderance of bearishness, almost overwhelming. The bearishness is seemingly well-founded, the arguments are cogent and persuasive and a further collapse in US equity prices seemingly imminent. Only problem has been the market hasn't co-operated, rising on the S&P500 from 670-odd to 1065-ish now.

It has been hard to find the contrarian, bullish, view and only now am I starting to see some bullish articles, this past week or so has been notable for some of the bullishness increasing. This, of course, is sowing my first seeds of discontent, and the cracks are starting to appear in the markets (subject for another thread).

Anyway, these two follow-up articles are worth a read and think about.

 

[skc]

You gotta understand the dynamics.

Lowering rates is bullish because it makes financing cheaper, more for business's bottom line.

Holding rates steady is bullish because it means CBs have engineered a Goldilocks economy... not too cold, not too hot, just right.

Raising rates is bullish because it means our economy is strong.

It's only bearish when.... errr.... When IS it bearish?

Lowering rates is bearish because it means there is not enough cheap credit going around and the economy is at risk of stalling.

Holding rates is bearish because it means CB are not doing anything to stimulate the economy.

Raising rates is bearish because it means inflation will come and saving is relatively more attractive than investing.

Your choice really.

 

[wayneL]

Lowering rates is bearish because it means there is not enough cheap credit going around and the economy is at risk of stalling.

Holding rates is bearish because it means CB are not doing anything to stimulate the economy.

Raising rates is bearish because it means inflation will come and saving is relatively more attractive than investing.

Your choice really.

Yeah but, CNBC doesn't see it that way.

Anyways, MISH has an article today on the topic of this thread.

Is The Stock Market A Leading Indicator?

http://globaleconomicanalysis.blogspot.com/2009/10/is-stock-market-leading-indicator.html

 

[inenigma]

I kinda liked Keynes quote in the first article....

“Markets can stay irrational far longer than you can stay solvent.”

 

[wayneL]

I kinda liked Keynes quote in the first article....

“Markets can stay irrational far longer than you can stay solvent.”

It's the only worthwhile thing Keynes ever said.

 

[Bushman]

It's only bearish when.... errr.... When IS it bearish?

When the cash rate is between 0-0.25%? That is a big 'we are faarked' and monetary policy can no longer save us 'SOS'.

Now what about big deficits and eroding the US dollar? It could see the return of the good old US manufacturing industry and some of those 'rust belt' endeavours sent overseas. So, eerr, bullish too?

 

[wayneL]

we are faarked

All other words superfluous to the discussion perhaps?
:

 

[Timmy]

Anyways, MISH has an article today on the topic of this thread.

Is The Stock Market A Leading Indicator?

http://globaleconomicanalysis.blogspot.com/2009/10/is-stock-market-leading-indicator.html

Went and had a read of Mish’s article. Summarising from the Big Picture and Mish, the answer to “Is The Stock Market A Leading Indicator?” is “Sometimes”.

On a day-to-day trading basis the ‘sometimes’ answer is a bit frustrating, but there you go. Found an article from Don Fishback (options guy) that was useful, it looks at correlations between stocks and oil, and stocks and the US Dollar. It is brief and worth a read. For example:

A classic example most of us are familiar with is oil. At times, lower oil prices are good for stocks, as the lower oil price reduces inflation, … as oil goes down, stocks go up.

There are, however, periods where the economy is so weak that lower oil prices are a sign that the economy is collapsing… when people and stuff no longer needed to be someplace else, oil prices collapsed … The collapse in oil occurred at the same stocks collapsed. During this period, oil and stocks were positively correlated.

And

That brings up the final point: relationships change. Sometimes, it really is different. As the chart shows, what is ignorant is thinking that this time is not different. In fact, it's always different. If things didn't change, if it wasn't different, then making money would be as easy as identifying a pattern and acting upon that pattern the same way each and every time. But it doesn't work that way. And the reason is that relationships change. What was once bullish becomes bearish, and then reverts back to bullish. It's always changing, which is why you have to adapt.

Link to the article:
The Need For Adaptive Market Indicators
October 14th, 2009
https://www.donfishback.com/blog/

 

[Uncle Festivus]

Shouldn't it be the other way around - What Does the Economy Have to Do with the Market? should be - What Does the Market Have to Do with the Economy? Diddly sqaut at the moment - it's all Fed Juiced momentum. SME's all over the US and the UK, and if you delve a bit deeper here in OZ as well, are going to the wall or doing it really tough from being denied access to funding. This is still in the down phase and will continue to work through the real economy.

The market is currently pricing in a massive rebound in the general economy based on the market trading of a few banks which are making huge profits which are based on the market going up - closed feedback loop does not compute????

The Fed keeps reminding us that they now have a bias to start the tightening cycle because things are looking so good?? The moment they start hiking the rate it will all fall in a heap as they will then be forced into steeply higher interest charges on the TRILLIONS of debt they have borrowed to juice the markets higher and the attempts to push-prime consumption via cash advances for anything from cars to housing.

The Feds rock and the hard place are moving closer?

It's good to see Bernanke has called the bottom, it's just that he forgot to tell the real economy? Though it's better-than-I-expected so market rally?

Japan's Yamato Life has collapsed with debts of $2.7bn (£1.6bn), becoming the country's first insurer to be brought down by the credit crisis.

 

[Timmy]

Diddly sqaut at the moment

Ummm, yes, that's the point. We don't trade the economy, we trade the market (whatever market that might be for you) and in order to be in tune with the market, focus on what the market is doing.