It’s easy to confuse the stock market with the economy. They are clearly related but still different. I have compared them to a brother and sister — related but different.
Another comparison is to an aircraft carrier and a fighter jet. The economy is big and lumbering, like an aircraft carrier. It does not change directions quickly, compared to the stock market or fighter jet, that changes directions quickly and easily.
If you think about the stock market’s overly-dramatic melt-down in December and its subsequent melt-up in January, you know the economy was not behaving the same way — no melt-down and a no melt-up. The fighter jet just hit an air pocket, called the Fed’s interest rate increase. But, did you react to that?
The stock market can affect the economy but only in the very long run. That happens if the stock market weakens consumer and business confidence.
The economy weakens and strengthens slowly. The stock market is more like the mercurial emotions of a teenager. That’s why most advisors recommend you “buy and hold” — buy stocks you like and sell them when you don’t like them anymore. You cannot sell your mercurial kid, and you should not sell your mercurial stocks. You can largely ignore the irrational gyrations of the stock market.
Long-term investors pay more attention to the economy. Short-term traders pay more attention to the stock market. Which are you?