Okay, I admit I have a healthy ego. But there are people I know and recognize that are way smarter than I am. Ray Dalio and the people at Bridgewater Associates are some of those people. I greatly respect their work product.
August 6, 2013
What the stock market is telling us about the US economy
Various statistics almost always provide conflicting messages about what is happening in an
economy, with the recent weak GDP and employment reports as the latest examples of headline
reports which diverged from other information that we are seeing. The most reliable perspective is
obtained by triangulating various sources of information against one another, comparing it to how the
economic machine works, and in that process include an eye on what the markets are discounting.
The U.S. stock market is particularly useful because it is one of the most complete discounting
machines in existence. Every stock, every sector and the market as a whole are continuously
discounting scenarios represented by future streams of cash flows. When we compare what we are
seeing through the window of the stock market to our read on what is going on, the picture is similar.
The economy is growing at a moderate pace that is fast enough to bring the unemployment rate
steadily lower, while inflation pressures are falling. Consumer demand is the strongest element of
growth, foreign demand is weak, the government is a net drag, and business spending is lagging,
reflecting these combined influences. Liquidity is flowing freely and credit conditions are improving.
Whether you look at the overall outperformance of equities in relation to bonds, or at the relative
performance of cyclically oriented stocks, the stock market suggests moderate growth toward the
upper end of the recent range. Cyclicals recently underperformed during the tightening of liquidity
and the rise in interest rates in May, but recovered quickly since then, indicating expectations that the
economy will be able to withstand the increase in rates.
By and large, what is being discounted in the stock market is consistent with what we see in the stats,
giving us a higher degree of confidence that the U.S. economy is on a path to normalization that is
well ahead of the rest of the developed world.
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury