Josh Brown, better known as the Reformed Broker, wrote a solid piece recently talking about the market vs the economy. I figured it was worth sharing some of his points and a few of my own. Oh, and by market I mean the stock market, not the sneaker market😉
He referenced a great analogy from a fund manager named Ralph Wagner. The story is “There’s an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the dog watchers, big and small, seem to have their eye on the dog, and not the owner.”
I thought this was a terrific analogy because it helps visualize what can be two opposite concepts – the market and the economy. While they both play off one another and are connected, the activity of one is not always in immediate and absolute correlation to the other although they are both generally heading in the same long-term direction.
Yes, the market and the economy are tied to one another, but it is more apparent over a longer time period. For those short periods of time, the market can appear like the dog walking through NYC. While the owner (economy) is slowly walking to their end goal, the dog (market) is bouncing all over the place even though it is on the same walk. In reality, there have been plenty of periods where the market has done well while the underlying economy isn’t as strong, and times where the market has done nothing even though the economy is robust. There have also been periods where they both move in the same direction.
Even those times when the “experts” are saying the economy isn’t doing well, it is usually still moving in a positive direction. Maybe just not as fast as some people would like it to. Think of it like the little engine that could as it just keeps climbing up that hill. It is important to remember the economy and the market are almost never as bad as they seem, even during the worst periods. They may also not be as good as they could be too.
It is times when maybe the market isn’t doing great but the economy is still growing that I am reminded of one of the famous quotes from Warren Buffett about being greedy when others are fearful. Investing in the market when it is moving down is a tough thing to do. Most people would prefer to invest when the market is touching new highs, although history shows us this isn’t always the best time, particularly over a short period of time. In these cases, you may be paying a premium for something that was just on sale a short time ago. However, odds are the economy is still moving in a positive manner, but maybe at a slower pace.
Ultimately, like Josh says – Understanding the economy is helpful. But, placing bets on the market based on your understanding of the economy is like playing a midway game at a carnival.