"Americans' confidence in the economy climbed in May to the highest level in almost six years as rising real estate values and record stock prices boosted household wealth," said a May 17 Bloomberg news story.
To decipher the meaning of economic reports like this is one the bread and butter of "fundamental" analysis. Inevitably, positive data are supposedly bullish for the stock market, while negative economic reports are bearish. But is this accurate?
What a strange question, you may say -- of course it is! Stocks don't fall after good reports, or rise after bad ones...do they?
Well, take a look at these financial news headlines:
-- Several Signs the Economy Is Reviving (New York Times)
-- Fed chief predicts economy will rebound despite housing woes (AP)
-- IMF predicts an energetic world economy (StarTribune.com)
-- Job Growth Strengthens Economy (Washington Post)
Can you guess when these were published? This week? Last week? Last month? No, no, and no.
They published in April-July of 2007 -- right before the 2007-2009 global financial crisis crushed the world markets and ushered in The Great Recession.
This DJIA chart (courtesy: Bloomberg) makes it clear just how mismatched the mainstream expectations back in 2007 were with reality:
Hang on, there is more.
Now read these news items and guess when they appeared:
-- S&P 500 is at risk of hitting a new low as angst persists (USA Today)
-- VIX Premium Shows Stocks Bear Market Lasting 2 Years (Bloomberg)
-- Why Stocks Still Aren't Cheap (New York Times)
-- [My favorite] "February's consumer confidence numbers were the lowest on record, going back to 1967. ...there can be no market turnaround until the consumer is confident once again" (Forbes)
Perhaps this was an easier guess -- February and March 2009, at the end of the graph above, just as the stock market was about to begin its multi-year rally.
The lesson is obvious: The apparent strength or weakness of the economy does not lead the stock market higher or lower. It's the other way around: "Stocks lead the economy, normally by months."
That's a quote from one of the essays by EWI president, Robert Prechter, who researched this subject in-depth. He also called for a "sharp" rally in stocks in late February 2009 -- despite the uber-bearish "fundamentals" at the time.