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The Economy and the Stock Market, Investments and Wealth Management

[The Trading Floor of New York Stock Exchange (NYSE) - Wall Street Journal]

The Stock Market Is Not The Economy.

- The Stock Market and The Economy

The “Stock Market” refers to the collection of markets (such as the S&P 500, the NASDAQ, or The Dow Jones) where regular activities of buying, selling, and issuing shares of publicly-held companies take place. The “Economy,” on the other hand, is the wealth and resources of a country in terms of production and consumption of goods and services and the supply of money. 

Although these two terms are often used interchangeably, they are not one and the same. They do however impact each other. For example, a strong economy can create fears that inflation is on the rise. Fears about inflation drive worries for investors that the Federal Reserve could raise interest rates faster than indicated. The worries about the Fed fuel a long-held view that rising rates kill bull markets, partly because companies tend to have slower growth when money becomes more expensive to borrow.  All this worry and anxiety can lead to a simple conclusion: Sell.


- Economic Indicators

Economists typically group macroeconomic statistics under one of three headings - leading, lagging, or coincident. Figuratively speaking, one views them through the windshield, the rear-view mirror, or the side window. Coincident and lagging indicators provide investors with some confirmation of where the market is and where it has been, and are a good place to start because they help indicate where the economy might be heading. 

How do we use economic indicators to help us try to anticipate the direction of the stock market? While we certainly do not have a crystal ball, we look at a variety of measurements such as GDP, employment rates, and jobless numbers as clues to where the economy is going. The consumer price index, producer price index, and retail sales are also seen as indicators of the health of the economy, by telling us how the consumer is feeling about the economy. 

Additionally, understanding the government’s use of Fiscal Policy and the Federal Reserve’s Monetary Policy is another way in which we can predict the stock market’s reaction to change. Fiscal Policy, implemented by the president and congress, is used to either pump money into a failing economy through government expenditure or take money out of the economy by raising taxes. Monetary Policy is the Federal Reserves raising or lowering interest rates for banks, which trickles down to affect what price businesses can borrow money to continue growing. 

In the end, the stock market and the economy are not the same.  However, they heavily influence each other. This relationship is something we will continue to track as we monitor the investing landscape.


(Salem, Massachusetts - Harvard Taiwan Student Association)

- Market Indexes

In order for an economic indicator to have predictive value for investors, it must be current, it must be forward-looking, and it must discount current values according to future expectations. Meaningful statistics about the direction of the economy start with the major market indexes and the information they provide about:

  • Stock and stock futures markets
  • Bond and mortgage interest rates, and the yield curve
  • Foreign exchange rates
  • Commodity prices, especially gold, grains, oil, and metals

Although these measures are crucial to investors, they are not generally regarded as economic indicators per se. This is because they do not look very far into the future - a few weeks or months at most. Charting the history of indexes over time puts them in context and gives them meaning. For instance, it is not terribly useful to know that it costs $2 to purchase one British pound, but it may be useful to know that the pound is trading at a five-year high against the dollar.


- Investment Management and Wealth Management

Investment management refers to the handling of financial assets and other investments - not only buying and selling them. Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well. The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

Wealth management is an investment advisory service that combines other financial services to address the needs of affluent clients. It is a consultative process whereby the advisor gleans information about the client's wants and tailors a bespoke strategy utilizing appropriate financial products and services. A wealth management advisor or wealth manager is a type of financial advisor who utilizes the spectrum of financial disciplines available, such as financial and investment advice, legal or estate planning, accounting, and tax services, and retirement planning, to manage an affluent client's wealth for one set fee.  

Investment management tends to focus only on investing assets; wealth management takes a broader approach. The former might be handled by a broker or an advisor focused solely on managing your portfolio. If you hire a wealth manager, however, he or she will typically look beyond assets to incorporate taxes, insurance, and the whole estate into the planning process.


- The Stock Market Is Not The Economy

The economy is complicated and it moves fast. News breaks and headlines don’t always tell the whole story. Usually, this simply means that fluctuations in the markets may have little to no real bearing on the underlying realities we think of as making up the economy. Or that there are many important structural factors that make the markets’ outlook different from how ordinary citizens view the country’s overall economic health.

The richest Americans hold the lion’s share of the value in the stock market despite the fact that about half of households own some stock.That means that the stock market and stock prices can be disproportionately influenced by a much smaller subset of the population and disproportionately influenced by the fortunes and alternative investment options of that smaller slice. If the markets are disproportionately influenced by that smaller subset then, by definition, something bigger is having disproportionately less influence, as well.

Another way in which the stock market and the economy are not synonymous is that you can have, you know, workers’ wages really stagnating or growing only marginally as compared to the increases that we’ve seen in the stock market. All of which means that there can be economic gains that are not accruing to the typical worker. So the stock market is not the economy. But the stock market is economy-adjacent.

The stock market is continuously observing the real economy. And based on what they see in the real economy, they make predictions. Investors and traders may be looking at what’s going on with trade policy, the unemployment rate,  housing data, or any of the many things that make up the economy, and use what they’re seeing to try to predict the future value of certain stocks.What happens in the real economy is contagious. And once it reaches the financial markets then it feeds back into the economy. 

But following each and every turn in the major indices probably isn’t a good idea for most people. The stock market is moody. We often refer to it as ‘Mr. Market.’ Sometimes he feels positive about the future and sometimes it feels negative about the future. Sometimes there is a reason to feel one way or another, and some of the times it’s just going with the flow. So, again, the stock market is not the economy. And the economy is not the stock market. But they are related. 

There’s not a lot of nuance, there are countless things that push markets one way or the other, but check in every now and then, and you’ll get a general sense of how things are going. 



[More to come ...]



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