There is a phrase that goes something like "the stock market has predicted 9 out of the last 3 recessions.” The bond market is guilty of the same thing, predicting at least 2 out of the last 0 recoveries. Now that the gospel of efficient markets is taught in business schools far and wide, not just Wharton, there can be a tendency to think that every move in the markets is predicting the future. Isn’t that why stock prices have a heavier weighting than, say, manufacturers’ new orders in the Conference Board’s index of leading economic indicators?
Markets aren’t fortune tellers. Markets measure expectations of the future, and those expectations change as the available information changes.
Tuesday, December 14, 2010
File under "go figure": Markets aren't fortune tellers....
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