PONDER this apparent mystery. In the three months to the end of September, the American economy grows at its slowest rate in almost four years as the long-feared housing market slump shows up for the first time in blunt statistical reality.
But in precisely the same three-month period, the stock market bulls ahead. The Dow Jones industrial average breaks through its record level (set back in early 2000, when the economy was coming off its fastest rate of growth in almost 20 years) and then ploughs on through the 12,000 barrier with apparently no sign of slowing.
Is the market behaving irrationally? Are investors failing to properly discount the real risk of an outright US recession? Or is the market acting as it is supposed to, as a forward-looking, rather than coincident, indicator? Will the third quarter of this year turn out to be the nadir of the slowdown, with corporate profits in the coming six months fully validating investors’ optimism in the durability of the US expansion?
When you see a GDP growth below one percent and at the same time market rallying to new high, probably the market has already discounted the poor GDP and is anticipating GDP growth rate recovery.