It is a truism that the stock market is a leading economic indicator—that is, how the market does tells us something about how the economy as a whole will do. As far as truisms go, though, this might be about as true as ‘Romney is the inevitable Republican nominee,’ ‘a black man will never be president,’ and ‘Adam Sandler makes
funny, worthwhile movies.’ All statements once accepted as true that are now demonstrably false. Yet if you watch nightly newscasts, read the paper, or listen to news on the radio you would think that daily market movements were indispensable to understanding the state of the economy.
The problem is that while it’s easy to understand the theoretical argument in favor of the stock market as an indicator, its fluctuations seem to be generally meaningless. For most of the past decade the market rose steadily, and those who held stock (most people these days, when you consider how retirement accounts are invested) happily watched their portfolios increase in value. Meanwhile salaries for most workers stagnated and benefits were cut. And then 2008 came along with the collapse of Lehman Brothers, the housing market, the credit crunch, and a reactive crash in the market. The market, of course, gave no hint of this. Unfortunately, asking the market how the economy will do is about as productive as asking Herman Cain what we should do in Libya. (Worth a watch if you missed it: http://www.youtube.com/watch?v=KAGGpK7bSWc)
This past week the market shot up over 7%, representing a gain of billions of dollars for investors. But yet again this gain is a reaction and not an indication of anything aside from the fact that for the next few weeks or months investors are less worried about European economic collapse (because of central banks agreeing to prop up weak European banks) than they were before. But the moment that changes, and it easily could, all those gains (and possibly much more) will disappear.
So what gives? Why do news outlets constantly tell us that the market is up or down as if it means anything? I’m tempted to go with the Fiddler on the Roof answer (‘Tradition!’), but that isn’t very satisfying. I can more easily explain why CNN seems to debut newstainment programs that better belong on MTV every month (and then cancels them) than I can explain the fascination with daily stock market reports. If you work on Wall Street or are a day trader the fascination with the market makes sense, but if you’re one of those people it’s unlikely you need Brian Williams telling you every night what you already know. So my answer is that it’s a form of magic realism, or wishful thinking. People want the markets to make sense and be meaningful because we don’t like chaos and randomness. So we hear that the DOW is up or down and ascribe meaning to meaninglessness. But we might be better served by finding an indicator that actually indicated what we think it does.