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The gauging power of the stock market

Marketplace Staff May 4, 2009
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The gauging power of the stock market

Marketplace Staff May 4, 2009
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TEXT OF INTERVIEW

Steve Chiotakis: We’re set to get more economic barometers this week. Construction spending today, service sector numbers tomorrow, April unemployment Friday. Things have been sour at best on a number of those fronts lately, but there’s one gauge of the economy that’s been on an upswing: the stock market. And that lends itself to the question of whether that’s a sign of things to come.

Fortune Magazine’s Allan Sloan is with us now. Allan — truth or tale — stocks really make a difference in the outlook of things?

Allan Sloan: Well, we can make that at least some of us have a lot more wealth than we did two months ago, you know which is always nice. And that you can see there’s a spirit of optimism created by the fact that stocks are up because that’s the indicator most people see and they tend to be happier when it’s up than when it’s down.

Chiotakis: These stocks — namely the S&P 500 — it’s one of the leading economic indicators that the conference board looks at, right?

Sloan: Right, and there’s a myth in the world that when the stock market goes up, it means the economy’s going to be strong, you know, a few months down the road, and that when the market goes down, it’s forecasting economic weakness. And that’s the reason that the conference board uses this as one of the indicators. However, there are at least 10 others, some of which have greater weight in the calculations than the stock market does. There’s the difference between long-term and short-term rates, there are all sorts of things about construction and orders and applications for unemployment insurance. So the S&P 500, which is what they use, is one of 11 indicators and not the most important one — and that is because it is not terribly reliable.

Chiotakis: So what indicator would you look at? What’s the most accurate one, the one that you’ve looked at that you say, “This is how I’m going to determine what the heck’s going on?”

Sloan: I don’t pretend to know what the economy is going to do in the short-run, so I don’t clutter what few neurons I have remaining in my mind by worrying about things like this, because I know I can’t predict it. I try not to get involved in things where I know I’m going to mess up.

Chiotakis: Fortune Magazine’s Allan Sloan, joining us from New York. Allan, thank you.

Sloan: You’re welcome.

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