Everybody knows there is a difference between the economy and the stock market, but they are so closely related – think brother & sister – closely related but still different. Wearing my economist hat, I see good data points follow good data points. Yes, the most recent ISM reports slipped slightly but are still very expansionary. Plus, the creation of new jobs is almost amazing, averaging 250 thousand a month. The economy is solid!
Wearing my strategist hat, I am more worried. Looking at the stock market, the record fall in December doesn’t concern me as much as the daily volatility. There is a rotten fish somewhere! It may be the momentum trading or algorithm trading. It may be the explosive growth of passive investing or ETFs, which facilitates the movement of capital, treating good stocks the same as bad stocks. It may be the 100% reliance on technology or the secrecy of dark pools. It may be things I don’t know. This doesn’t suggest the stock market is about to crash. It was down 20%, and everybody freaked out. Now, it is only down 12%, and everybody has stopped freaking out.
Most likely, this brother and sister are drifting apart due to the intolerant politics. Leave the big, bumbling economy alone, and it will bumble along nicely. The beauty of capitalism is that it is largely self-correcting. Leave the quickly shifting stock market alone, and something will come apart. It is not self-correcting. One day, this volatile stock market will cripple the economy, but that day is not today.