Why the stock market does not reflect the economy

Steve Pearlstein of the Washington Post has a good piece on measuring the economy in an age of globalization (Self-reflectiveness alert: The piece does mention the work Sue Houseman and I have done).  He writes:

A frequent mistake — one of which I am as guilty as anyone — is using the performance of the broad U.S. stock market indexes, and the companies that comprise them, as a proxy for the performance of the U.S. economy. Until the late 1990s, that might have been a reasonable presumption. Since then, however, most of the large companies reflected in those indexes have transformed themselves into global enterprises with global supply chains, global sales, global workforces and global sources of capital. That their shares are listed on a U.S. stock exchange is something of an historical artifact.

Steve makes a great point, that other journalists need to read very closely as well.  I might write up a list of 10 “do’s and don’ts” for writing about the global economy.

 

 

Comments

  1. Michael,

    Someone might create two “shadow” stock market indices: one of companies that are purely domestic and a second one for which international sales are the majority of their sales, maybe over 2/3rds, say. Then we could compare the regular index to domestic companies and primarily international companies.

    Mark Michael

    • Mike Mandel says:

      That’s a good point. But it couldn’t be just sales…you’d have to look at the source of purchases as well, which is much harder.

  2. martygl says:

    Michael,

    in perhaps my longest comment ever. The difference is also reflected in the fundamental lack of understanding of the current generation of investors/investment advisors of the reality of even the medium term relationship between those two things. Quarter after quarter we watch as companies acquire other companies in the same industry, using their hoard of cash to reduce the net GDP and employment to the detriment of the shareholders of every other public company and the economy as a whole. Yet thos ecompanies are inevitably rewarded with higher valuations for buying short term EBITDA, reducing net R&D, adding to unemployment and essentially throwing away investment capital.

    Until the “smart” investors, huge retirement funds, hedge funds, institutions, start punishing companies for creating short term profits at the expense of a sustainable businees (and economy) they will continue to do what they are rewarded for, poor long term management. From a pure investment standpoint it is a recognition that rewarding the companies that will provide sustainable higher returns is, again, a better investment than making an extra 3-5% this year.

    But people like you need to create that cultural awareness.

  3. Howdy my pal! I have to declare that this text is definitely amazing, pleasant composed and come by using about many important infos. I would like to view additional threads in this way .

Trackbacks

  1. […] Why the stock market does not reflect the economy […]

  2. […] returns have been poor, but as Michael Mandel wisely reminds us, the market does not necessarily reflect the […]

  3. […] returns have been poor, but as Michael Mandel wisely reminds us, the market does not necessarily reflect the […]

  4. […] The stock market is not the same as the economy. When the stock market was rising, it didn’t mean the economy was good. When the stock market is falling, it doesn’t mean the economy is bad (see here) […]

  5. Anonymous says:

    Numbers……

    I guess this is technically political, but maybe someone will find the numbers useful. On another blog, a commenter had posted an argument that the economy is much improved over the last few years. He made several pointed statements and questions regar…

  6. […] returns have been poor, but as Michael Mandel wisely reminds us, the market does not necessarily reflect the […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Archives

Follow

Get every new post delivered to your Inbox.

Join 65 other followers

%d bloggers like this: