No, The Stock Market Isn't A "Leading Indicator" Of Economic Prosperity

“STOCK MARKET UP ANOTHER 300 POINTS,” Donald Trump tweeted on October 12, with characteristic overcapitalization. “GREATEST LEADING INDICATOR OF THEM ALL!!!”

President Trump’s use of the stock market as an economic indicator is hardly unusual. Democrats like to tout the stock market performance under Obama as a counterpoint to Trump’s boasting. This type of thinking, which equates stock market performance with economic health, is widespread. It’s also somewhat understandable; by the twentieth century, middle-class stock ownership had become the standard strategy for saving and investing, giving most citizens a personal interest in market activity. When the market goes up, investors benefit, and this makes market activity a powerful political issue.

However, as a metric of the overall health of the economy, stock market performance is, at best, a misleading and unreliable indicator. Strictly speaking, stock prices indicate nothing more than the price people are willing to pay for partial ownership claims in businesses. With a stable money supply—a fantasy scenario in the modern world—stock market gains would reflect increased levels of savings and productivity and would indeed be indicative of economic growth.

Why Stock Prices in an Inflationary Economy Are Different

But for inflationary economies, which have become the global norm, newly created money bids up these prices, without—or in excess of—actual savings. In one sense, this is not unlike the effect money supply inflation has on every other marketable good, and the fallacy of viewing inflation-driven price hikes as economically desirable is not as absurd as it might immediately appear. In the 1930s, it was precisely this line of thinking that drove New Deal policymakers. Thinking price increases could somehow spur the economy to new heights, New Dealers curtailed production, burned crops, and slaughtered livestock to prop up farm prices as a solution to the Great Depression, even while millions of Americans struggled to feed their families.

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