One of my pet peeves about financial and political reporting is that the stock market is often looked to as an economic indicator. If the stock market is up, then this is claimed as evidence the economy is doing well. Indeed, I remember listening just a few years ago to a radio interview with W.’s labor secretary, Mrs. Mitch McConnell Elaine Chao, who said the stock market’s performance is the only economic indicator anyone should ever be concerned with. And this was the Secretary of Labor, forgawdsake!
Now I’ll admit that there may once have been a reason the stock market could legitimately be thought of as a valid indicator for how well the national economy was doing. Basically, the idea was that stock prices reflect the market’s estimation of companies’ future profitability. So if the market believed the economy was doing well or (more accurately) was going to do well in the future, then companies were expected to realize greater future profits. Greater profit meant the companies would be worth more, and this would be reflected in their stock prices. So if market investors were bullish on the American economy, then they were bullish on the stock market as well.
But there are two important things to note about this model. First, the performance of the stock market doesn’t actually predict the nation’s economic future so much as it reflects what investors already think that future looks like. Second – and more importantly – looking to the stock market to tell you how the United States economy is doing only makes sense if the value of the companies traded in that market does in fact depend on the U.S.’s national economy.
It is becoming increasingly clear that not only is Wall Street not dependent on the nation’s economy, its goals run directly contrary to the nation as a whole. It has gotten to the point that when I see the Dow Jones has ticked up a notch I immediately think to myself, “I guess we’re all about to get screwed just a little harder.”
