But that doesn’t seem to match up with what’s happening in the economy right now. The stock market’s role is to reflect expectations. In 2009 the stock market had its best year in a decade, but forecasters were almost uniformly expecting sluggish growth for years to come. The market’s expectations were clearly much more aggressive.
According to a New York Times article today:
The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”
The improvement in consumer demand seem to be broad-based, extending even to high-dollar items like autos.
…after months of cutting inventory to bring it in line with weakened demand, the nation’s retailers are ordering more merchandise. The cargo volume at major ports that handle retail imports is expected to increase 8 percent in April compared with the period a year ago, according to the National Retail Federation and the consulting firm Hackett Associates.
“What I’m hearing across a wide swath of retail is that sales are simply much stronger than companies had expected,” said Robert Barbera, the chief economist of ITG, an investment advisory firm.
Anecdotal evidence is also falling into line. The article cites the experience of a retailer in New Jersey:
Lauren Keshet, the owner of Paws and Claws, a pet care company in Hoboken, said her business suffered when the economy nose-dived and consumers snapped their wallets shut. “My business went to half” of what she had been selling, Ms. Keshet said. But today, “my business is booming again,” she said. “It’s really come back.”
So has her spending, and that of other shoppers she has seen lately at the Westfield Garden State Plaza mall in Paramus, N.J. “Right now I’m renovating my house,” she said. “I’m buying furniture.”
Pet care is clearly a discretionary expenditure and the fact that even those types of businesses are expanding bodes well for consumer spending down the road. Far from being “unsustainable,” it now appears that the stock market correctly expected a much stronger rebound than the economists.
One of the reasons that we hew to a systematic approach to investing is precisely because it is in times of emotional stress-when the economy is falling down around your ears-that investors are most prone to believe in a very negative scenario. Investors definitely had this problem last year when surveys indicated that 70% of retail investors did not participate in the rally. (When the economy is rolling, investors are equally likely to believe in a very rosy scenario-and they are equally likely to come to grief for the opposite reason.) Markets based on supply and demand are a much better reflector of expectations than economists’ forecasts. Ignore forecasts and pay attention to what is.
