The Difference Between The Stock Market And The Economy

As an investor you will encounter days where the Dow is up 1000 points. We have the Dow intraday… the biggest points gain ever. One thousand and thirty six. You will also encounter days where the Dow was down 800 points. The Dow Jones Industrial Average tumbled by 831 points, that’s 3.2%. The Dow dropping more than 650 points the largest December decline since the Great Depression. People ask all the time when they see a huge move in the market. Does this mean I’m going to lose my job? Does this mean I’m about to have the best year I’ve ever had in my business? What is the relationship between what stock prices are doing each day versus what’s happening on Main Street, what’s happening in the real economy? I like to use an analogy of a man walking the dog across a park. Try to picture that. You got a guy. He’s got a leash. There’s a dog on the other end of it. They’re walking in the same direction. However, if you observe the way the man crosses the park. His gait. His stride. it’s fairly straightforward. Very few deviations kind of like an economic trend. Then when you think about what the dog is doing. The dog is running around like a lunatic. The dog is barking at people. It darts to the left. It darts to the right. It strains on the leash. Maybe it chases a squirrel, barks again. The thing with the dog is that’s the stock market. The man walking the dog is the economy. So they both end up in the same place. They’re both sort of walking in the same direction most of the time. There’s a lot less deviation in how the man walks than how the dog walks and I think when you consider the stock market barking jumping back and forth straining at its leash that’s a really good way to control your own emotions and to say to yourself “Ok the economy is probably not fluctuating to the same extent that the dog is or the stock market is.” So we use that analogy all the time. Here’s the S&P 500 plotted against GDP growth. You’ll notice that in any one given year you can have some divergence between the two. Look at 2009 real GDP fell 2.5%. Stock market meanwhile went up 26% that year. The 1970s all for some examples of that 1975 real GDP meaning inflation adjusted economic growth fell 0.2%. Stock market was up almost 40% that year. Again, they’re related kind of going in the same direction over long stretches. But in any one calendar year, they don’t necessarily have to look alike at all. Now here’s something really important. All things being equal, even if I gave you next year’s economic information, what would you do with it? You certainly would know what the reaction of the stock market or the bond market are going to be. You could have any economic outcome and have any stock market reaction to it. Up to an including a terrible reaction a great reaction or no reaction. Now what about the reverse. Do stocks tell us what the economy is about to do. The answer is very unsatisfying sometimes. So stocks are thought of as a leading indicator for the economy but a lot of times they get things wrong or stock market prices overreact. Good evening, The stock market went into a freefall losing more in one day than it did on Black Tuesday in 1929. I always point out in 1987. That was a 23% percent crash within one day. The economy didn’t even notice. I don’t think anyone should panic because all the economic indicators are solid. But we’ve had examples where the stock market has been an accurate predictor of what would happen with the economy and maybe the best example would be the 2000 dotcom crash the worst day ever on Wall Street. All the major indices are now down for the year. We had an incredible economy from 1982 until the year 2000 and then all of a sudden the stock market was saying things have gotten way too hot started to come down got worse spread from technology stocks into mainstream stocks and within a year we were in a fairly long recession. So there are times where the market is giving you that signal. Then there are times where the market is giving you a signal that doesn’t end up leading to anything. And being able to tell the difference between the two is nearly impossible especially in real time. So whenever you hear someone make a stock market forecast based on how the economy is currently doing or how they think the economy will be doing, it’s very important for you to remember how many other variables impact stock prices and the stock market. Everything from geopolitics, natural disasters, interest rates, tax rates. Whether or not there is any kind of fiscal program that takes place. Whether or not there is any kind of change in the law for things like buybacks or dividends. There are so many things that can happen that are not GDP that will affect the prices of stocks that it’s nearly impossible to point to any one metric whether it’s jobless claims or economic growth or overseas economic growth and say this plus this equals that. If it were that simple we would all be rich. Everyone would know exactly how to invest and 2018 offers us a perfect example. Exciting! Live! Breaking news! The American economy growing at its strongest pace in four years Payrolls rose by 250,000 jobs. So here’s a year where you’ve got solid GDP growth you’ve got the unemployment rate steadily dropping month after month millions of jobs being added really no negative issues with the economy whatsoever. All of the ingredients that you can ask for to say this is a good economy this is a good environment for business. Stock market went down 5%. You said yourself well wait a minute. If you had told me at the end of 2017 that I would have all these great things I wouldn’t have expected a down 5% year for stocks and that goes to show you how many other ingredients there are that affect the outcome. By the way expectations are one of the most important ingredients we came into 2018 already expecting all that great news. So stocks have been priced for the best we got the best and guess what they were already worried about 2019. The other thing I would mention if you think about the dog analogy walking through the park, a lot of stock market participants expect the Federal Reserve to watch the dog and to some extent the dog is worth watching. But I do think it’s important to realize Jerome Powell the Federal Reserve chairman his real job is to focus on the man walking the dog. And so you may see a lot of volatility in the markets that doesn’t necessarily get a reaction from the people who set monetary policy.

100 thoughts on “The Difference Between The Stock Market And The Economy

  1. I wonder whether dot com burst was the cause for an economic downturn rather than a leading indicator. Besides if you only know that something was an indicator after the fact then i am not sure how useful that is. But I like the explanation. I would add that theres a lot of emotions of individual investors in the stock market and constant overreaction to news cycle. Plus high frequency trading that deliberately adds to volatility.

  2. Decent video, Josh tells it straight, though it glosses over the casino gambling that goes on on Wall St. and how private profits come at public costs. Though the long term trend is upward, how many times have retail investors been devastated while the relatively few trillion(s) $ sharks feed?

  3. Meanwhile the rich get richer and the poor get poorer.


    Big businesses get even bigger the little businesses go out of business.

  4. Very nice video. 7 min video that goes over topics that I took in an Intermediate macroeconomics class (roughly 3 weeks of material in a 5-week class).

  5. His job may be to watch the man, but I'm pretty sure he's been reacting to the dog lately. Well unless you count the orange man.

  6. I really liked this guy's analysis, analogy and just speaking style. He really broke the differences down in a concise manner. Which is odd, most speakers bore or annoy me paha. I wanna see more of this guy. He's great.

  7. Buy Bitcoin. Letting the dog off the leash is of course, quantitative easing. Dog's been off the leash and lost for over 10 years.. yet owner still pretends to have the dog under control.

  8. Good thing you avoided the 2008 crisis because the analogy of the dog would not make sense and you would have to take down the video.

  9. I always imagine stock market and econemy as two weights. The stock market has a much lower mass than the economy so every little push has a big impact. The economy doesnt reply as fast but if you push on it long enough it will go in the same direction as the stock market.

  10. 3:50 they mention the year 2000 and right after that, there she is: the year 2000 herself, including the only-for-a-few-months-that-year-resurrected-chocker necklace and the let's-try-to-also-relaunch-eightys-old-fashioned-hairspray hairdo

  11. Wow! Have we forgotten our history of why empires came to ruins? They imploded by the same monies system that can never sustain itself.
    Knowing this isnt the sight for this, but, Invest in God with only your trust. Nothing priced can help us.

  12. Stock market is BS. Stocks goes down because people are selling them so some reason, and that worries others. So then that leads to a sell off.
    Especially tech stocks. Those stocks have more to do with how that company is doing, not any outside factors.

  13. Secure your profits and cut your losses. Most people don't understand so they tend to demonize it. I think the stock market is awesome.

  14. Stupidest analogy ever. Really, explain how the stock market is a financial casino compared to the day to day economics of living.

  15. The economy vs stock market theory with the dog is funny because china is literally backing it's big manufacturing plants to try to keep them afloat. The new "jobs" opening up in the US is also funny because of the HUGE massive layoffs happening monthly from big businesses, especially manufacturing.

  16. Very good explaination..though the layman still wont get it..Another reason for the masses to just punch in an keep workin!

  17. Oh my gosh! the man walking the dog is the best analogy on the market/econony i have ever heard of! thank you!

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  19. I humbly disagree: the S & P 500 (the stock market) is the economic elite(those who work 52h when you work 45h),
    to get there, you must be a superior mammal!
    ย In other words, there is no correlation between the stock market and the real life, if you want to vibrate with the economic elite, buy stocks;

  20. US Fed's printing press or unlimited Fiat currency is the real reason for stock market's excellent performance.

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  22. The Dog-Man analogy is best explaining the stock market fluctuation
    I'll definitely use it for my finance class presentation.

  23. Are you telling us , all the economists , stock individual , market tv guys , are frauds ??? Iโ€™m not questioning you because itโ€™s true ….Iโ€™d just like to hear it from other people …lol

  24. A yield inversion is a vote of no confidence in long- term investments. The same sentiment also generates recession. Threats and counter threats in the world's political system saddens business sentiment worldwide. The time approaches for worldwide WRATH Revelation 11: 18.

  25. Stock market makes business evaluations based on "high level" numbers that are very difficult to read into even if you are a professional. Instead there should be a system where as investment should be based on company actual performance in the things it promises to deliver (or sell). The knowledge of the middle income individuals who work and know how things go are much more able to actually measure the company ability to deliver and serve markets.

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  27. Great analogy with walking a dog. But besides that, he just rambles. He's clearly been at this for a long time, but still somehow can't put 1 and 2 in the right order. The stock market tries to prempt the real economy, which means sometimes it overreacts, underreacts or nails it. But it can also exercebate a slowdown in the real economy (e.g. dotcom bubble).

  28. That is the dumbest analogy ever. How do you compare humans to animals?!…. YOU CAN'T. It's like comparing greed to necessities. You are a complete IDIOT.

  29. Everyday lazy people gamble whit the money of people .
    Everyday the people get paid in the banks who let gamblers do what they do whit the money of single people.
    The work against lazy investors? and the top lies.
    If you work and produce more the investors in the middle are out of money incomes.
    The economy of the world is simple if the economist people work ?
    Production ,Work ,Distribution and the free choice of consume, This are the true rules of Capitalism.

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