The Stock Market is Not the Economy
We often hear that the stock market provides a good indication of the health of an economy. It may be time to rethink that notion.
The best performing stock market in the world this year, up over 200%, is none other than Venezuela. The Caracas Index has more than quintupled over the past year and has doubled over the past two weeks alone.
Is the Venezuelan economy booming? Far from it.
According to the IMF, Venezuela’s economy is expected to contract by 7% this year and another 4% next year. The Unemployment Rate is expected to reach 16% and annual inflation is estimated at more than 100%. Shortages of food and other consumer products have become common.
Why, then, is the stock market surging higher? Is it indeed a leading indicator, forecasting phenomenal growth to come?
No. Frantic investors are using the stock market as a vehicle to hedge against rapid currency devaluation. Better to hold stocks than bolivars (the Venezuelan currency) is the prevailing thinking.
While the official exchange rate has not budged at 6.3 bolivars per dollar, the black market is indicating otherwise. The Venezuelan currency has reportedly declined more than 80% in the past year to over 400 bolivars per dollar.
The Venezuelan example is an extreme version of what’s occurring globally, where stock markets are booming while economic growth slows.
This is leading to perhaps the greatest disconnect between stock prices and economies that we have ever seen. Unlike Venezuela, Central Bank policies are the primary driver of this disconnect in other regions.
Chinese stocks are up over 50% this year while growth has slowed to its lowest level since 2009. China’s central bank has cut rates three times in the past six months and is expected to continue easing going forward.
Italian stocks are up over 25% this year with flat GDP growth and 13% unemployment as the Euro has plummeted amidst QE and negative interest rates.
In Japan, stocks continue to hit new highs even as the economy has fallen back into recession (-1.4% GDP year-over-year). Debasement of the Yen in order to lift stock prices has become a national objective.
In the U.S., stocks continue to hit new all-time highs this year while the economy contracted and earnings declined in the first quarter. The Federal Reserve is credited for this development as they continue to hold rates at 0%, pushing back plans for the first interest rate hike in nine years.
Central Bankers are increasingly pointing to record stock prices as “proof” that their policies are “working,” but their argument is starting to lose credibility after six years of the slowest growth in history. We have all learned by now that you can debase or inflate your way to a higher stock market. What remains unclear is how a higher stock market and asset price inflation without real wage growth leads to an increase in prosperity for all.
Are the short-term movements of the stock market really the best metrics by which to evaluate the efficacy of monetary policy? Only if you believe that the stock market is the economy. To that end, I would start by asking the thirty million Venezuelans what they think.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
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