The Myth of the Stock-Economy Connection

Last week, I wrote a column in Time about the unfortunate tendency of investors, pundits, economists et al to view stock markets as barometers for the economy and economic data as indicators of the markets. This tendency is pronounced in the media in general and the financial media above all, which looks daily for a story about why markets move up or down.

Almost everyday, some sort of economic statistic is released by government, ours or some government somewhere. Whether that is GDP data (which was released today and showed a not-too-impressive 2.4% growth for the second quarter) or inflation or durable goods or consumer confidence (not a government statistics but one that gets a lot of attention), each day brings the release of some economic figure. That permits a daily narrative that links the release of the statistic to the movement of the markets.

As if to prove that point, an article appeared in the New York Times on July 28, with the following headline: "Shares Fall as Data Says The Economy is Weakening." The piece actually came from Bloomberg news, but no matter. It was yet another example of the false correlation between markets and economies.

Stocks represent ownership stakes - tiny ones - of companies, and companies increasingly exist in a universe only marginally related to any one national economy. They can, in fact, avoid many of the things that drag down national economies - labor, health care, taxes, old people, young people. And they can take advantage of things like cheap and plentiful global capital, easy mobility of goods, and increasingly helpful information technology systems that allow them to increase efficiency and productivity. They exist in their own transnational economic system, and the value of their stocks has little to do with whether the U.S. economy or any economy is ailing.

Of course, investors still believe in that correlation, and so trade the economic news, which in the short term means that stocks can track the economic data for that reason. But that doesn't mean that a company such as Microsoft or Caterpillar is nearly as tethered to or dependent on the health of the economy in order to make colossal profits. And the sooner we collectively recognize the degree to which corporate land has broken free of national economies, the more we will be able to have the right discussion about national economic policy and about how and where to invest.
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Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of The Leading Indicators: A Short History of the Numbers that Rule Our World. More

At River Twice Research, Karabell analyzes economic and political trends. He is also a senior advisor for Business for Social Responsibility. Previously, he was executive vice president, head of marketing and chief economist at Fred Alger Management, a New York-based investment firm, and president of Fred Alger and Company, as well as portfolio manager of the China-U.S. Growth Fund, which won a five-star designation from Morningstar. He was also executive vice president of Alger's Spectra Funds, which launched the $30 million Spectra Green Fund based on the idea that profit and sustainability are linked. Educated at Columbia, Oxford, and Harvard, where he received his Ph.D., he is the author of several books, including Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (2009), The Last Campaign: How Harry Truman Won the 1948 Election, which won the Chicago Tribune Heartland Award, and Peace Be Upon You: The Story of Muslim, Christian, and Jewish Coexistence (2007), which examined the forgotten legacy of peace among the three faiths. In 2003, the World Economic Forum designated Karabell a "Global Leader for Tomorrow." He sits on the board of the World Policy Institute and the New America Foundation and is a member of the Council on Foreign Relations. He is a regular commentator on national news programs, such as CNBC and CNN, and has written for The Wall Street Journal, Newsweek, Time, The Washington Post, The New Republic, The Los Angeles Times, The New York Times, and Foreign Affairs.

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