Markets aren't always good forecasters

A trader works on the floor of the New York Stock Exchange as a chart shows the downward track of the S&P 500 Index during afternoon trading in New York City.

TEXT OF STORY

Kai Ryssdal: There was a huge rally on Wall Street today. I guess traders have finally gotten over that case of the stimulus package blues they had last week. You know, economic forecasting and explanation is a tricky beast at best. And as we have said before many, many times, the stock market only tells you part of the story.

Marketplace's Jeremy Hobson reports.


JEREMY HOBSON:The stock market is sort of like the guy who has an opinion on everything. Or maybe, says Bruce McCain of Key Private Bank, it's the boy who cried wolf.

BRUCE MCCAIN: Absolutely, it's the difference I think between the rational side of human behavior and the emotive side of human behavior. As one economist noted, the market has forecast eleven of the last eight recessions.

Get it? Eleven of the last eight recessions? Now, McCain is not saying we should dismiss the stock market -- just take it for what it is. A reliable gauge of public sentiment -- often about 4 to 6 months in front of the rest of the economy.

MCCAIN: When the public is worried and when that's reflected in stock markets that are sagging, it's probably quite likely that they're also going to be reluctant to spend on consumer spending or on business spending.

Economist Peter Morici at the University of Maryland spends a lot of time predicting what the economy will do. Every couple weeks, he sends out an email with forecasts for dozens of economic indicators -- other than the stock market.

PETER MORICI: To me, industrial production and unemployment are the most important gauges.

But he says, when the economy does bottom out, we're likely to hear about it from Wall Street first.

MORICI: People start to get new orders, businessmen start to get more optimistic. The analysts that drill down and do company analysis pick up on that and it starts to be reflected in stock prices.

Of course, Wall Street investors are famous for buying on the rumor and selling on the news. And rumors... are occasionally wrong.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...