The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Double Expresso?

03/04/2019

The conventional wisdom is that the economy and the stock market move together.  In the long run, that is true but not always in short run.  This is one of those times, when the stock market is doing too good!

At first blush, Wall Street cheered when the Q4 GDP growth showed 2.6%, considerably better to the 2.2% that was expected.  Assuming 2.6% is correct, that is still slower than any other quarter last year.  GDP growth is slowing – not stalling, just slowing.  Also, the ISM Manufacturing Index was the lowest in two years.  Housing starts plunged 11.2% in December, while building permits increased.  None of this is cause for alarm, as the economy is still growing, albeit more slowly.

So how is the stock market doing?  It is up 12% this year.  The stock market is moving faster than the economy.  That may suggest the market needs to slow down, until the economy catches up.  It could also mean that consumers, who remain surprisingly confident, are plowing more money than usual into their IRAs at the first of the year.  Or, it could mean the “smart money” on Wall Street sees the economy accelerating later this year.  Traditionally, we use the stock market as a forward indicator, usually in the neighborhood of six months or so.

My theory is that we are seeing a double-relief-rally.  The Fed’s steady increasing of interest rates was weighing on the economy.  Plus, the fear of a serious trade war with China was also weighing on the market.  Relief from either fear would propel the market upward.  Together, the market is blessed with a double dose of relief.  Both good events are already priced into the market

Did you ever have a double-expresso?  Wall Street just did.

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