Today’s stock market is the closest thing to a crystal ball as you can get. It is a forward-looking instrument, and the only one that accurately predicts future economic activity.
Obviously, being able to think ahead has its advantages. You can better plan your trades (obviously), but more importantly, you can create a sound strategy for whatever’s coming. Depending on what you see, you can take a more cautious approach and keep plenty of dry powder (cash) on hand. Or, you can take a contrarian stance on a sector that looks weak – or a bolder one on a sector that looks strong.
At the end of the day, the trader who can think ahead is most likely to be rewarded.
What is today’s stock market telling us about the economy?
Let’s consider the most recent economic data. There is no disputing the ugly numbers plaguing the manufacturing, housing, retail and transportation sectors, all of which are critical areas of the economy.
Look back a few months, and you’ll see that the stock market already discounted this economic data. In May, the stock market was wobbly. Did it see bad data on the horizon? Probably, because the forecast was correct. Six months later, and the data for those sectors has been poor.
Today’s stock market is hitting all-time highs and rising just about every single day. What’s the message? In four to six months, economic data will be strong.
Yes, I realize this forecast is not a guarantee. Anything can change at any time, like it did in late 2018.
As long as trade disputes or breaking news don’t rain on this parade, you will likely hear analysts raise GDP and earnings estimates for early 2020. While that may seem like a bold statement, this is what the stock market is telling us. Unless you happen have a crystal ball, it is the most accurate tool we have for predicting the economy’s performance. I’ll take it.
PS – you can read more about the stock market-economy relationship here.