What Is The Message Of The Markets?

The answer to the article title probably has only two good answers. The one we believe is the economy is getting back on track and will grow strongly in the months ahead. Now to some, that might be a bold prediction. I can tell you this: the stock market is the best predictor of economic activity and has rarely if ever failed.

You might ask about the spring, when the markets took a nasty turn as COVID-19 started to spread like wildfire around the globe. Markets took a major hit just as the economy was buckling under.  A 34% drop in GDP still stands as a record for the quarter, but the sharp rebound the next quarter (up 32%) was also a record breaker.  

The timing and the quick drop and recovery was clearly not seen from the markets back in 2019, but shocks do happen. It's how we adjust to those shocks when our knees wobble that says the most about how we may recover.

So why do I think the market is telling us good times are coming? Remember, the stock market is a great discounting mechanism. It discounts prices about six to eight months in advance. Hence, we can draw a conclusion that today's market action is predicting strong economies around May/June 2021.  

Remember, stock prices today are not reflecting the news of the day, rather trends in earnings/growth out into the future. Hence, when a company reports strong earnings and rises sharply, the markets are estimating an acceleration in earnings to continue. That has happened the last couple of quarters with Target, you can see the chart and understand.  

With stock markets at/near all-time highs, it is not unreasonable to believe the economy will be strong in 2021. How things change based on other news events/happenings is not predictable. The message of the market is a strong one: bullish for now, but cautious of getting too overbought. We have entered a seasonally strong period, so there is wind in the bulls' sails.