Stocks Have Risen When The Economy Is Down
Principles of the Stock Market

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Have You Seen This?

Have You Seen This?



The key thought:  History shows the economy can be bad and the stock market good!  Understanding that one idea is key to making a logical decision about the stock market here.  I tried to get this across at Elizabeth’s 9th birthday party to the family Saturday.  The stock market is climbing its “wall of worry.”


THE SITUATION.  My stock market and economic history studies of the Great Depression of the 1930s convinced me that stock market can rise while the underlying economy remains in a very weak condition. Because it’s happened before.  In the 1930s depression, even while US unemployment remained at horrific, double digit levels for the whole decade and with few safety nets in place to help destitute Americans and with great ongoing divisiveness between political parties, the stock market posted a five year bull market run up, from 1932 to 1937.  So, yes, there can exist a great disparity between the stock market and the economy.  This confounding, confusing conundrum can exist as long as the economy is not sinking and/or when the economy stabilizes, no matter at whatever low level of economy activity.  I believe that’s because the US capitalistic economy is essentially revitalizing and self-healing.  Helped today, because over our history our capitalistic system has grown so large and diverse.  In other words, first because Americans, with our continued open borders to any nationality, are a breed of extremely ingenious risk takers and thus will find ways to survive and prosper if allowed to do so.  If, from time to time, when capitalism gets in a bind, it gets jumpstarted.  Or gets the table reset when it knocked awry.  Secondly, because today, there just are so many different industries, businesses, ideas, innovations in all parts and regions of America.  Just meaning that while construction and manufacturing are down, maybe technology and the media are up.  Or while Michigan is down, Tennessee is up.  Or while big business suffers, smaller businesses spring up.  I’m too provincial to see all this metamorphosis first hand and thus explain this concept more completely but what I see today is an America in downsizing mode, say moving to a rightsizing scale, but not in total collapse mode.  Just like China, America in our own way is using this crisis, individuals one by one, businesses one by one, even the government is adjusting, although not totally because the government is itself the ultimate safety net when any major crisis hits.  Our government, we’ve learned from past crises, is the rarely needed (thank goodness!) jump start provider, booster or table setter.  Thus today America is using this financial crisis to rid our economic system of the bloat, the fat, all the long built up excesses, our bad behaviors and habits, particularly our overspending, even the corruption which always builds up during “unfettered capitalism,” seemingly prosperous but under the surface unhealthy, unsustainable times.  Exactly why economists look at recessions as normal, healthy and needed cleansing events and why throwing money at any and all past downturns in recent decades led to this larger than life recent disastrous event.  Schwartz View:  My conclusion thus -- to get back to my opening statement that stock markets can rise while our economy is down and dirty, weak and lackluster and in substantial downsizing mode -- is that what investors mainly have to fear today is indeed fear itself.  That fear partially coming from not being able to understand how the stock market can rise as we read about and see big economic trouble all around us.  As I see it that’s investor’s biggest bugaboo now.  We all know or should know that, as William O’Neil, founder of Investor’s Business Daily has always stressed, that success favors the optimist.  Now I don’t mean the Pollyannas, I won’t besmirch the many of this ilk whom get be angry, they got their comeuppances by getting blindsided and riding the stock market down for 17 straight months between October 2007 and March 2009.  But today, since we’ve moved past the bankruptcy risk, at least for the time being, no guarantees about future shocks knocking not us back down, we should overcome our fears and our misunderstanding of the economy and stock market relationship and again participate in the stock market to the extent of our own financial goals and objectives and how we’ve performed over the last two, years, during the bear market since mid-2007.  To reiterate since this concept is so darn important, the hardest move to make is to buy stocks after this financial earthquake and while we see all the resulting damage around us.  In other words, to separate the stock market from the economy.  It’s very difficult for us investment professionals as well because every day we watch the stock market closely and/or read every update about each remaining financial problem.  We all need to overcome our fears to make money during this full cycle.  Easier said than done!  




The economy is so large and varied now that even with the shock and resulting dead stoppage of economic activity for many months, we’ve been able to stabilize the economy.  Thanks to our government learning from our past travails and understanding its role.  President Bush gets much credit but he’s gone now and thus last Friday I heard the first words uttered about an “Obama Miracle.”  Pulling totally out of this massive slump is another thing and may take much time yet although we could post some surprisingly great numbers in coming months.  Inventory rebuilding looks good statistically and allowing home foreclosures provides changes of ownership from the overextended to new risk takers.  Still, over America’s 200+ year capitalistic history we’ve built a vibrant and reenergizing economic system so there’s always something good taking place somewhere and while the distressed and/or overbuilt areas of our economy right size the in fashion areas keep us moving forward.  And our government has and is still performing admirably (sorry, I know many readers don’t agree with me), stabilizing our financial system and thus setting the stage to allow capitalism to provide us with future growth while at the same time realizing that any and all government intervention always adds additional drags on the economy and is trying hard to avoid such.  While at the same time smartly tackling our long term deeply entrenched and ignored major issues  and thus pointing America towards a more fundamentally sound future, remaining as one of the world’s leaders.  Such as taking the lead in going green as the “clunkers for cash” program epitomizes.  Americans really want to do their part and this program is providing one capitalistic way to do so.  Getting polluting cars off the road while stimulating growth at the same time and in essence cutting back money supporting terrorism.  I gotta love it!  Schwartz View:  So, we’re back on the right track in lots of ways and I’m delighted.  But don’t get complacent.  Please keep reading! 


Please email me at [email protected] for how the stock market will respond to the above analysis and whether, in the following THE STOCK MARKET and PORTFOLIO STRATEGY sections it’s time to buy the stock market today or not.

Posted 08-03-2009 9:49 AM by Richard Schwartz