Friday, March 4, 2016

Economy: Wall Street Is Irrelevant

(Drivebycuriosity) - If you needed any proof that Wall Street is irrelevant you got it in the recent weeks. While the stock market was falling - early February the S&P 500 lost about 10% year-to-date - the US economy got better. In February American companies added 230,000 workers to payrolls in February, the unemployment rate stayed at 4.9%. The latest numbers for personal income & spending, retail sales, industrial production & durable goods orders all showed solid growth as well (driveby).

Some commentators claimed that the stock losses and the gloomy sentiment will soon spill over into the real economy. They assumed that investors, employers and consumers would be scarred by the stock market correction (temporarily more than minus 10% below the latest peak). Wrong and disproven. They also claimed that suddenly something will happen that would confirm the correction. Wrong again.

The fundamental data from the economic frontier show that stock market and economy went separate ways in the begin of this year. The gloomy commentators in the media (MarketWatch, Bloomberg, BusinessInsider and more) and the majority of the pessimistic portfolio managers and advisers don´t have any superior knowledge.

Often the stock market behaves temporarily randomly and irrational (nine-of-five-recessions). In the short run stock prices are often driven by sentiment. The sharp losses we saw in January & February, especially for bank & Internet stocks, were caused by typical herding behavior. Usually hedge funds and other speculators buy and sell the same stocks, at the same time, and track each other's investment strategies. It looks like that these speculators have to buy back the stocks they have been dumping some weeks ago. The recent stock market correction was just a sideshow.

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