Two common investment questions I get these days besides the obligatory check to see if my crystal ball has any market predictions (it doesn’t) are:
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Why are stocks recovering given all this economic mayhem?
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Will excessive government debt be a problem for stocks later?
This article does a nice job addressing both topics. It’s a bit jargony, but worth a read. The main takeaways are:
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Markets are forward-looking. Current year stock market returns don’t tell you much about how the economy is doing now. However, a prior year’s stock market return tells you something about the current year’s economic activity.
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A country’s debt-to-GDP ratio (comparing a country’s public debt to its gross domestic product, with gross domestic product being the total value of all goods and services created by a nation’s economy in a given time period) tells you little about future market returns.
In short, markets process a ton of information and are forward- looking. They are fairly efficient and a reliable indicator of what economic activity and business performance will be, while looking past what they are now. Put another way, if you and I are talking about something we know about the economy, or a potential concern, then it’s likely the market has priced that information in already. While not always true, it’s a good way to think about markets and investing. Respect the markets and only second-guess them when you have the expertise necessary for your contrarian conviction.
For more on this, you can check out Protecting Your Portfolio From The News.
