Remember, the stock market is a leading indicator.
What Is a Leading Indicator?
This should probably get its own post, along with what is a lagging indicator, but that isn’t the point of this article, so let’s hit the highlights.
At the most basic level there are leading indicators and lagging indicators. A leading indicator is a measurement of what is to come. A lagging indicator is a measurement of what has already happened. At a metaphorical level, the display on your car that says you have 80% of the life of your oil left is a leading indicator. It is measuring the future. Note that it does NOT predict the future. It’s a best guess effort based on available data.
Contrast that with a lagging indicator, which measures something in the past. Metaphorically, this might be the sticker on the windshield that says the mileage of the last oil change, or your maintenance log.
In the world of economics, most lagging indicators are big data compiled by the government. You may have noticed that the June Labor Report comes out in July. That’s because you have to wait until the end of June for all the data to even exist. Then, you have to compile it into a report.
This doesn’t mean it has no value. On the contrary, it is a valuable piece of information about how the economy is doing.
A leading indicator is one that is a measurement of the future. Since the future is unknown, leading indicators are, by definition, not 100% accurate. The stock market is a leading indicator. It is a measure of the expected value of business and companies. So, while the stock market is moving up, it means that investors think the economy is still growing.
Are they right?
That is is the key to who makes money and who loses money investing in the stock market.
Based on the data right now, maybe so, but what people forget is that things change. Not just the market being wrong, but the actual world around the market changing. Things like new tariffs change the status quo. Things like rising deficits, tax changes, and interest rate moves all change the status quo. So far, the investors in the stock market think things still look fine.
But, it won’t take much to change their minds. Everyone has one eye on the exits at this point. Whether or not they need to use them, and when, is the million dollar question.