June 3, 2020 - Market Behavior and the Economy

June 03, 2020
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As states cautiously begin the process of relaxing their COVID-19 restrictions, some are wondering, “Why is the stock market doing so well when the economy, according to many, is doing so poorly?”

It’s a great question, and fortunately, one that's been answered before. To find the answer, we’ll need to dust off those economic textbooks of yesteryear and turn to the chapter on “lead, lag, and coincident indicators.”

“Lead indicators” are factors that are used to anticipate what may happen 6-9 months in the future. Think of the stock market as the foremost lead indicator. Now, imagine that the stock prices today are anticipating where the economy will be in 6-9 months. Is it correct? Despite what some may claim, no one knows for sure.

Alternatively, “coincident indicators” attempt to show the state of the economy right now. For example, gasoline deliveries are currently trending higher, consumer confidence appears to have stabilized, and airlines are seeing more bookings. Even the supply of toilet paper seems less of a concern these days, with Google searches for TP falling to near-normal levels1,2. This may hint at higher consumer confidence at present.

Finally, “lag indicators” provide insight into past economic data. They may confirm long-term trends, but they are not very good at forecasting. The consumer price index is a historically classic example of a lag indicator. It tells us what inflation was but doesn’t provide much insight about the future.

In general, when trying to evaluate why the markets are behaving a certain way, it may be best to gather as much data as possible. Economic indicators can help provide context for what can often seem counterintuitive behavior, especially in the face of intense global disruption.  Reach out to one of the advisors at Journey Advisory Group if you’d like to chat about the economy or other financial topics you’re pondering. The Advisors at Journey Advisory Group are here to help.

This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with Journey Advisory Group.

  1. MarketWatch, May 20, 2020
  2. MarketWatch, May 20, 2020