Americans love to worry about the economy. It seems like there is always something going wrong, or about to go wrong. There’s one big problem with focusing on the economy-it’s not always very connected with the stock market, or at least not in the way most investors think it is.
Investors seem to have the belief that they can forecast the stock market from watching the economy. According to an article on Bloomberg, most Americans missed the run in the market last year. Only 30% of investors said their portfolio gained value last year, a problem which seems directly connected to the fact that two-thirds of investors feel the economy is getting worse, not better. Their economic views apparently led them to stay out of the market and as a result 70% of them missed the best year in the last decade.
What investors are failing to recognize is that the stock market trades on expectations, not current reality. The stock market is a leading indicator of the economy, not the other way around. In point of fact, the S&P 500 Index is one of the components of the Index of Leading Economic Indicators-and statistically the most reliable of the components. Trying to forecast the market by looking at the economy is not only impossible, it’s ass-backwards.
[...] Why looking at the economy for clues to the stock market gets things backward. (Systematic Relative Strength) [...]