A friend of mine, someone completely outside of the Wall Street world, asked me this question a few days ago and in addition to being at an utter loss for the answer, I thought it was one of the more interesting questions one could ask right now.
My friend, we’ll call him Dirk (if only because I’ve always wanted a friend named Dirk), has been watching the massive rally in the stock market on TV and in the papers. Every day, he tells me, he hears the same two things:
1. Unemployment Skyrocketing
2. US Stocks Skyrocketing
He cannot reconcile how these two things can happen concurrently and I’m sure he’s not alone.
Now, as even the most casual market participant knows, employment and jobless rates tend to be considered lagging indicators, meaning it’s not until things have improved for a few months or quarters that businesses have enough confidence to take on new employees. Fine, let’s take that as accepted gospel for now.
So what will give businesses the confidence to hire and expand? My friend is asking whether or not companies, large and small, will look to the stock market as their gauge?
Will they be emboldened strictly by the fact that capital can be raised, IPOs can come public and mergers seem to be happening again?
Will the asset price improvements that come along with S&P 500’s monster run bring business people back around to thinking about growth again?
I am not an economist (clearly!) and frankly, I cannot think of any historical precedent for an economy being revived by the stock market itself. This would seem to me to be the ultimate case of the tail wagging the dog. That said, most of what’s been done in Bailoutland has been squarely aimed at boosting (propping up) the stock market, so it wouldn’t amaze me if stocks ended up fixing the overall economy, if and when that actually takes place.
Right now, the greenest of green shoots appear to have ticker symbols, as stocks more than any other asset class or indicator are acting well. It’s been drilled into all of our heads that stocks are anticipatory by at least 6 months, but even after a 6 month rally, every other piece of actual US economic data still seems to be disastrous (regardless of the easy comps, manipulation or spin).
This is what has both Dirk and myself curious about the stock market’s ability to lead, not just predict, a broader recovery.
Anyone got any thoughts on this possibility?