The stock market leads the economy, not the other way around
It’s a wonderful thing when jobs are added to the U.S. economy.
But, as far as investing goes, history shows that you should not bet your stock market portfolio on it. Conversely, even a series of weak jobs reports doesn’t mean you should bet against stocks.
This is worth mentioning because many pundits believe big economic factors like jobs determine the stock market’s trend.
Consider this from CNN Money:
Solid corporate earnings coupled with continued demand for new technology bode well for the major U.S. stock indexes. So do expectations of a buoyant economy at home and a recovering one overseas. [emphasis added]
When do you think this article was published?
Well, it’s hard to tell because the narrative could fit different timeframes in recent history. Plus, correlating strong earnings and the economy with gains in stocks is all too common.
That article was published on Dec. 31, 1999 — just two weeks before the DJIA hit a milestone high and then went on to shed nearly 40% of its value through October 2002.
We saw a similar narrative near the 2007 peak. By the time June 2007 rolled around, the Elliott Wave Financial Forecast noted:
Just as advocacy of the New Economy blossomed in early 2000, a wide array of rosy long-term scenarios are now proclaiming “a special time in market history.” “This group of extreme optimists believes that global economic strength will keep shares rising for much longer than has been common in previous eras.” [emphasis added]
Again, the DJIA topped soon after and went into the worse bear market since the Great Depression.
Now, let’s look at what happened when job numbers were weak. On Feb. 6, 2009, a headline said (Center for American Progress):
Job Losses Continue at Accelerated Pace
Wouldn’t you know it — just a month later, the stock market bottomed and went on to quadruple through January 2018. So much for the shrinking U.S. economy in 2009 and the unemployment that hit 10% in October of that year.
Even this brief overview of recent market tops and bottoms makes clear that jobs and the economy FOLLOW the stock market, not lead it.
The belief that jobs reports lead the market is just one myth.
Learn about others in our special, free report, “Market Myths Exposed.”
Did you know that the vast majority of portfolios are built on false assumptions? These false assumptions — or Market Myths — have been passed down across generations. They are so baked into investor psyche that no one ever thinks to challenge them… but we do. Do earnings really drive stock prices? Can the FDIC actually protect you? Is portfolio diversification a smart move? Download Market Myths Exposed now and find out whether your portfolio is built on flawed foundations. We guarantee you’ll be shocked to find the truth.
This article was syndicated by Elliott Wave International and was originally published under the headline Here’s Why “Strong Jobs” Don’t Mean “Higher Stocks”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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