The Markets and Economy are Loosely Connected | SJS Investment Services

The Markets and Economy are Loosely Connected

July 16, 2020

Just like walking your dog!

By Scott Savage.

Why is the stock market so volatile? What is today’s big drop telling us about the economy? What about yesterday’s big jump? Is there a recession coming? Another depression? Will I miss out on a market rebound?

We are experienced enough to know that we don’t know all the answers. But history has demonstrated that over long periods of time, the stock market and the economy are linked. As the stock market goes, so goes the economy. However, in any given year, economic ups and downs can diverge significantly from the direction of the market.

A well-traveled industry metaphor may be helpful in understanding the relationship between the day to day movement of the stock market and the real economy.

Imagine a dog owner steadily walking her dog through the park. The dog is on a leash but doing what dogs do in a busy park on a leash: barking, jumping, straining on the leash. To the left, then right, and then SQUIRREL!

The dog is the stock market, the dog owner is the economy. They end their walk in the park together, but along the way they sometimes move together, sometimes in opposite directions. If you simply watch the dog for a period of time, you might not know WHAT direction they are headed!

So the next time the market goes way up, or way down, we hope the dog owner and their “best friend” analogy will help you keep the long term view. That’s the view—and destination—we had in mind when your investment portfolio was designed in the first place.