subject: Is The Stock Market An Indicator Of Future Economic Conditions [print this page] Economists state that "the stock market is one measure of the current value of the nation's stock of capital and is often viewed as a barometer of business and consumer confidence regarding the future. A high and/or rising stock market may signal robust growth of business investment and consumer spending in the near future while a low and/or falling stock market may signal sluggish spending. For this reason, the S and P 500 is one component of the Index of Leading Indicators".
The question is if the above statement is actually true. What can you infer from the recent action of the stock market performance in predicting the economic outlook for the remainder of 2010? It is interesting since the S and P 500 had a good climb for the first four months of 2010 but it dived in May, 2010 due to the uncertainty of economic conditions in Europe.
So let's analyze what we do know. We know that housing starts are up for the first quarter of 2010. We know that business profits are also up. We know that even though the value of homes as reported by Case-Shiller Home Prices were down 3.2% for the first quarter of 2010, they are up from the same quarter of 2009. In addition to this, all of the forecasters that I read about are predicting that the growth that has begun will continue through 2010. It is true that unemployment is still high but that is a lagging indicator.
So what do you conclude from what the S and P 500 has done during the month of May? Are the problems in Europe going to send us into another recession or is the concern merely going to blow over? That is a hard one to decide. It is true that the strong European countries are offering to bail out the weak ones. Will they be able to keep these countries economies going?
According to a monthly outlook article written by a Wachovia author in June, 2010 the economy will "incorporate a significant slowdown during the second half of the year". They are predicting that the GDP will slow down from a 3.4% rate the first quarter of 2010 to a 2% rate for the remainder of the year. They attribute this to the continued winding down of the various stimulus programs and the reduction in inventory building. They do indicate that it is difficult to quantify the impact of the Gulf Oil Spill and the European financial crisis. One bright spot of this is that inflation is not expected to rise until the first quarter of 2011. We will probably not see an increase in interest rates by the Federal Reserve until then.
We need to keep a close eye on what the banks are doing. This author indicates that "banks have become leery of lending to each other lately due to concerns about sovereign debt exposure". They indicate that the current warming in the economy could weaken if banks get too worried and pull back on the little bit of lending they are currently doing.
The next few weeks should tell us a lot. During the month of June, 2010 we have seen the S and P 500 move above the 200 day trending line but has recently encountered a downward turn. However, it continues to have support at the 1040 line. If the S and P 500 can continue its support and then develop an upward trend, this may be an indication that the economy is in fact improving.
