The Stock Market and the Economy

Seasonal factors could help lift the market but the fundamentals in the economy could help keep it up. The stock market is normally an excellent barometer of economic health. The bear market that began in early 2000 accurately anticipated the economic recession of 2001. But the market and the economy then experienced an unusual decoupling.

Even though the economy turned up in early 2002, stocks were still hitting new lows three quarters later.

The stock market’s plunge has weighed on both consumer confidence and business sentiment, endangering the economic recovery. Moreover, many companies have had a difficult time raising the capital they need to meet rising demand.

Nonetheless, the economy still has a lot working in its favor. The government has turned on the fiscal spigots. The Federal Reserve has kept interest rates at 40-year lows until recently. Homeowners have taken advantage of extraordinarily low interest rates torefinance their mortgages and cash out the equity in their homes in record amounts.

Significantly, even the unemployment rate has shown signs of stabilizing. To complete the picture, however, business investment needs to recover. That last piece could soon fall into place.