Economists and Investors

Why do investors listen to economists?

The short answer is, it improves their opinion of meteorologists. The long answer is, the market depends on earnings, earnings depend on revenues, and revenues depend on the economy. So, a strong economy should lead to strong earnings and a strong equity market, and vice-versa.

Except when it doesn’t. Good economic news can become bad market news when filtered through the Federal Reserve. A stronger economy means higher interest rates which means a higher discount rate applied to stock dividends, and lower stock prices. Finance trumps economics. Or a weaker economy leads to cheap financing and aggressive CEOs who seek to grow through acquisition–leading to a stronger market. Investment trumps finance.

The investment business is a multi-dimensional chess game in which the economy operates on one of the more important planes–but only one. The others include finance, investor psychology, diversification, animal spirits, tax policies, the Fed, and others. Prediction is a dangerous endeavor.

There’s a story about Admiral Halsey during World War II: his weather forecaster told him that Pacific storm patterns were impossible to predict. He famously replied, "Forecasts may be useless, but I still need them for planning."

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-08-12T04:32:20+00:00 August 12th, 2013|Global Market Update|0 Comments

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