The Difference Between The Stock Market And The Economy

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The Difference Between The Stock Market And The Economy 5
Each day, investors are treated to news about the economy and information about how the stock market has done recently. It can be very difficult to process what’s going on because at any given moment in time, there may be very little correlation between how things are going in the real world and how prices are acting on Wall Street.

The noted fund manager and author Ralph Wagner once described the relationship between the economy and the stock market thusly:

“There’s an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch.”

“But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the dog watchers, big and small, seem to have their eye on the dog, and not the owner.”

I use this analogy all the time to help people understand how the economy and stock market play off of each other. One of the hardest things to do as an investor is to entertain two opposing thoughts in our minds at once, and find a way to keep them despite the cognitive dissonance this can produce.

One of the most ironic aspects of investing is that the greatest gains lie ahead at times when things are bad, but not quite as bad as everyone suspects, and slowly, almost imperceptibly getting better. This is the moment when assets are selling at discounted values and the opportunities are laying at our feet, there for the taking.

Conversely, the worst time to invest is once everyone agrees that the environment is terrific and that the gains will continue as far as the eye can see. It is at this moment we find ourselves paying up for assets and competing with lots of other buyers.

But most of the time, neither the economy nor the stock market is as good as it could get, or as bad as it could get. Typically, the economy trudges along a straight path for years at a time and it’s the stock market that is easily excitable, ripping to and fro based on the latest information to hit the tape. Over longer periods of time, we do see a correlation between stocks and the economy, but over periods of less than a year, there is literally no rhyme or reason for what has happened. All explanations are simply ex post facto; an expert grasping at straws to assemble a reasonable take on what has occurred, and why it ought to have been obvious to everyone.

Understanding the economy is a helpful exercise. Placing market bets as a result of this understanding is a carnival game on the midway.


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The Difference Between The Stock Market And The Economy

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💬 Comments on the video
Author

Oh my gosh! the man walking the dog is the best analogy on the market/econony i have ever heard of! thank you!

Author — Bella Marley

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Picking up the poop is, of course, the CORRECTION.

Author — h0ll0wm9n

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This Josh Brown guy is awesome. Really like his insight

Author — Alex Fuentes

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Stock market and economic performance is always crystal clear, when looking in the rear view mirror.

Author — David N. Waldrop, CFP®

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The dog analogy is nice.
Except the dog is the size of a dragon and grabs the man through the ground.

Author — Will S. J.

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You gotta stay away when the dog is chasing a squirrel and go all in when the dog is takin a dump. 🐶

Author — Chris D

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I really liked this guy's analysis, analogy and just speaking style. He really broke the differences down in a concise manner. Which is odd, most speakers bore or annoy me paha. I wanna see more of this guy. He's great.

Author — Balram Trivedi

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One of the best investing advise from CNBC.

Author — K W

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This is how someone bulshits when they know nothing of the subject!

Author — PUNE DARSHAN

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Can anyone answer why trading in the stock market capital is more than the US economy?

Author — Woodward

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Trump should watch this and leave the FED alone.

Author — Anki Jin

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I never comment but this is a great video. very insightful.

Author — m

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he explained so well i wish he could do a video on bitcoin and crypto currency.

Author — zusiphe sikayi

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Him and Carter Worth are my favorite guys on CNBC.

Author — Bong

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So its like trying to understand women.

Author — Mark Rotar

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The stock market is an experiment, let’s not forget that. The fact that it is not tightly tightly regulated in and of itself is criminal in the abuse that it allows. This is a dog that stops to dig up peoples lawns and takes giant dumps while the owner can’t even agree to itself they need to be cleaned up (ie: the person walking the dog is crazy too and is probably txting). Hopefully the hilariously inept system we have now can be refined as people understand their role in participating in a democratic economy.

Author — Casey Smith

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The Dog-Man analogy is best explaining the stock market fluctuation
I'll definitely use it for my finance class presentation.
Thanks

Author — F2_ ly

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After the Powell capitulation and reversal it's clear that he's chasing the dog (market), rather than focusing on the man (economy).

Author — ralow702

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Very good explaination..though the layman still wont get it..Another reason for the masses to just punch in an keep workin!

Author — Sydney Austin

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The economy vs stock market theory with the dog is funny because china is literally backing it's big manufacturing plants to try to keep them afloat. The new "jobs" opening up in the US is also funny because of the HUGE massive layoffs happening monthly from big businesses, especially manufacturing.

Author — Michael Ciccolella