markets
The economy is not the market
The rule
The stock market has predicted nine of the last five recessions.
Where it flips
This does not mean the basics never matter. Over long stretches, real cash flows anchor prices. The point is that at any single moment, the market trades the change in hopes, not the plain state of the economy.
Samuelson's joke captures a truth. Prices move on surprises and changing hopes, not on the level of GDP. A strong economy that everyone already expected is not good news. A weak one that everyone already feared is not bad news. The reader watches the gap between what is priced in and what actually arrives, not the headline growth number.
A worked example
A reader sees Indian GDP printing a healthy number, yet the index falls because the market had expected even better. The level was fine. The surprise was negative. [illustrative]
How to spot it
- ·good data met by falling prices
- ·the level watched instead of the surprise
- ·hopes and expectations left out of the reasoning
- ·GDP treated as a trading signal
Paul Samuelson · attributed quip