Many of us know that stock markets have always been a poor proxy for judging the health of an economy. But most people do it anyway. When stock markets do well, the economy is judged to be doing well. When stock markets do poorly, the economy is judged to be performing poorly. But what most people don’t realize is that stock markets are a lagging indicator. By the time they start to decline, the economy has already been weakening.
That’s why the fact that stock markets are still hitting all-time highs isn’t an indicator that the economy is healthy. What markets are really signaling is a top to the bubble. A crash is not just likely, but all but inevitable.
Just look at how stock markets reacted to last week’s economic data. GDP revisions indicated that the economy actually performed far worse last year than had previously been reported. And corporate profits were at their lowest level since 2011. Yet the Dow Jones, Nasdaq, and S&P 500 were all up on Friday. The disconnect between actual economic data and the performance of stock markets has never been more readily apparent.
By now it should be obvious that the economy is slowing. With corporate profits low, stock markets largely fueled by corporate buybacks, and the prospect of more tariffs and a growing trade war becoming ever more likely, the economy will only grow weaker in the future, not stronger.
If you’ve made profits in stock markets, now’s the time to take your gains and protect your assets. It’s been a wild ride over the past year and a half, but there has been plenty of warning that we’re about to enter an economic downturn. Everyone thinks that they can sell their stocks to someone else before things get bad, but that’s not a sure thing. Don’t get left holding the bag once stocks start to turn south.