Here is a reminder of something we often forget.
I offer it because I tire of lazy journalists who say and write things like “The job figures released today sent stocks lower...” Or “The recession has slowed the overall growth of the stock market this year.”
And vice-versa: “Good news on consumer spending turned out to be good news for stocks…”
The reminder is that the economy and the stock market are not the same. And the health or malaise of the economy is not necessarily linked to the stock market.
We are conditioned to believe the two are closely linked. Conditioned by the media. Conditioned by conversations with friends: “Hey, in this economy, stocks have GOT to go up.”
And so we are often confused when the economy goes in one direction while stocks go in the opposite.
Stocks, of course, are pieces of big businesses. But I can illustrate my point by using a small business as an example.
Suppose you own a general store. Your business is healthy. You have made good profits the last several years. And now arrives…a lousy local economy. Local companies lay off workers. Some go out of business. Many of your customers are out of work. They spend less with you. Because they have less to spend.
How is your business doing? It is doing better than before. True. That is, your profits are better. How can this be?
Faced with this lousy economy, you made a few smart moves. You renegotiated your lease. Your landlord agreed to a lower rental because he was worried you might close.
Next, you laid off some staff. You stopped paying bonuses. You found some cheaper health insurance. You required workers to pay some of the health insurance premiums. You reduced your contribution to their 401k’s.
You also invested in some energy-saving equipment. This lowered your heating costs. You also cut back on what you spent on advertising.
You put the squeeze on your suppliers to get some better pricing. And to be allowed to pay them in six months for merchandise you receive today. Instead of paying them within two months.
Meanwhile, you culled products that gave you modest profits. You concentrated on products that provided higher rates of profit.
In these and other ways you cut your expenses pretty dramatically. So that even though your sales dropped, your profits actually went up.
Companies across the economy make similar moves during recessions. Some report higher profits from lower sales.
Back to the stock market. Many things affect prices of stocks. One of the biggies is profits. Earnings.
The investors that move the market do not get distracted by the state of the economy. They focus on a number of things that have little to do with the economy. They particularly focus on earnings and earnings trends.
This is why the stock market often goes up when the economy heads south. And it is why professional investors scoff at the lazy journalists who never learn this.
From Tom ... as in Morgan.
For more columns, for Tom’s radio shows and new TV show (and to write to Tom): tomasinmorgan.com.