The Stock Market is NOT the Economy

Many of my clients are starting to lose faith in the economy. The worry being that if tariffs remain or increase, as we are experiencing now, we will see higher inflation, unemployment will increase, and corporate profits will decrease. Thus, plunging the economy into recession.

The question is, why are we not seeing this reflected in the stock market? It seems that Wall Street is ignoring the news and continues to crank out new highs, while Main Street seems to be struggling. We have to remember that the stock market is not the economy. Some of the rationale for this is that the stock market responds to corporate earnings. Corporations are currently doing well. They are using pre-tariff inventory, have diversified supply chains, along with cost-cutting efficiencies, pricing power, and have access to borrowing. All these factors can provide relatively high earnings. Economists are expecting high single to double digit earnings continue this year and into next year.

Another aspect of this is selective behavior, tariffs and inflation are hurting small businesses much more than multinational corporations. The difficulty in finding workers, tighter credit, and inability to hold larger inventories hurts small and mid-size businesses much more significantly than large corporations. The large corporations dominate the indices such as the Dow Jones and the S&P 500.

Current monetary policy is adding to the rising stock market. Interest rates are relatively low making the possible returns on stocks more attractive to investors than the yields on bonds.

Markets often exhibit short-term optimism or momentum chasing, especially when headlines are mixed. How long this will continue during these uncertain times is anyone’s guess. However, staying invested in a well-diversified portfolio will always lead to better long-term returns than trying to time the market.