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as an investor you will encounter days
where the Dow is up a thousand points we
have the Dow interests HRP the biggest
points gained ever 1036 you will also
encounter days where the Dow is down 800
points the Dow Jones Industrial Average
tumbled by 831 points
that's 3.2 percent the Dow dropping more
than 650 points the largest December
decline since the Great Depression
people ask all the time when they see a
huge move in the market does this mean
I'm gonna lose my job does this mean I'm
about to have the best year I've ever
had in my business what is the
relationship between what stock prices
are doing each day versus what's
happening on Main Street what's
happening in the real economy I like to
use an analogy of a man walking a dog
across a park try to picture that you
got a guy he's got a leash as a dog on
the other end of it they're walking in
the same direction however if you
observe the way the man crosses the park
his gait his stride it's fairly
straightforward very few deviations kind
of like an economic trend then when you
think about what the dog is doing the
dog is running around like a lunatic the
dog is barking at people it darts to the
left it darts to the right it strains on
the leash maybe it chases a squirrel
barks again the thing with the dog is
that's the stop market the man walking
the dog is the economy so they both end
up in the same place they're both sort
of walking in the same direction most of
the time there's a lot less deviation on
how the man walks than how the dog walks
and I think when you consider the stock
market barking jumping back and forth
straining at its leash that's a really
good way to control your own emotions
and to say to yourself okay the economy
is probably not fluctuating to the same
extent that the dog is or the stock
market is so we use that analogy all the
time here's the S&P 500 plotted against
GDP growth you'll notice that in any one
given year you can have some divergence
between the two look at 2009 real GDP
fell two and a half percent stock market
meanwhile went up 26 percent that year
the 1970s all for some examples of that
in 1975 real GDP
inflation-adjusted economic growth
fellow point two percent stock market
was up almost forty percent that year
again they related kind of going in the
same direction over long stretches but
in any one calendar year they don't
necessarily have to look like at all now
here's something really important all
things being equal even if I gave you
next year's economic information what
would you do with it
you certainly wouldn't know what the
reaction of the stock market or the bond
market are gonna be you can have any
economic outcome and have any stock
market reaction to it up to and
including a terrible reaction a great
reaction or no reaction now what about
the reverse do stocks tell us what the
economy is about to do the answer is
very unsatisfying sometimes so stocks
are thought of as a leading indicator
for the economy but a lot of times they
get things wrong or stock market prices
overreact
good-evening the stock market went into
a freefall losing more in one day than
it did on black Tuesday in 1929 I always
point out 1987 that was a 23% crash
within one day the economy didn't even
notice but we've had examples where the
stock market has been an accurate
predictor of what would happen with the
economy and maybe the best example would
be the 2000 dot-com crash the worst day
ever on Wall Street all the major
indices are now down for the year we had
an incredible economy from 1982 until
the year 2000 and then all of a sudden
the stock market was saying things have
gotten way too hot started to come down
got worse spread from technology stocks
into mainstream stocks and within a year
we were in a fairly long recession so
there are times where the market is
giving you that signal then there are
times where the market is giving you a
signal that doesn't end up leading to
anything and being able to tell the
difference between the two is nearly
impossible especially in real time so
whenever you hear someone make a stock
market forecast based on how the economy
is currently doing or how they think the
economy
we'll be doing it's very important for
you to remember how many other variables
impact stock prices and the stock market
everything from geopolitics natural
disasters interest rates tax rates
whether or not there's any kind of
fiscal program that takes place whether
or not there's any kind of change in the
law for things like buybacks or
dividends there are so many things that
can happen that are not GDP that will
affect the prices of stocks that it's
nearly impossible to point to any one
metric whether it's jobless claims or
economic growth or overseas economic
growth and say this plus this equals
that if we're that simple we would all
be rich everyone would know exactly how
to invest and 2018 offers us a perfect
example exciting live breaking news the
American economy growing at its
strongest pace in four years payrolls
rose by 250,000 jobs so here's a year
where you've got solid GDP growth you've
got the unemployment wait steadily
dropping month after month millions of
jobs being added really no negative
issues with the economy whatsoever all
of the ingredients that you can ask for
to say this is a good economy this is a
good environment for business stock
market went down five percent if you say
to yourself whoa wait a minute
if you had told me at the end of 2017
that I would have all these great things
I wouldn't have expected a down 5% year
for stocks and that goes to show you
know how many other ingredients there
are that affect the outcome by the way
expectations are one of the most
important ingredients we came into 2018
already expecting all of that great news
so stocks have been priced before the
best we got the best and guess what they
were already worried about 2019 the
other thing I would mention if you think
about the dog analogy walking through
the park a lot of stock market
participants expect the Federal Reserve
to watch the dog and to some extent the
dog is worth watching but I do think
it's important to realize Jerome Powell
the Federal Reserve Chairman his real
job is to focus on the man walking the
dog and so you may see a lot of
volatility in the markets that doesn't
necessarily get a reaction
from the people who set monetary policy
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