Stock Market Predicting Long Term Economic Problems

When the credit crisis first started to rear its ugly head in late 2007 the stock market began to lose ground on the fears that the credit market could create a domino effect throughout the entire economy. Well, it clearly has done just that, and after the Dow has fallen about 50% since October 2007, the signs are not looking good for an economic recovery coming anytime soon.

Just about all economists as well as stock market strategists agree that the stock market is a forward looking indicator. What does this mean? It means that the stock market typically bottoms quite a bit before the overall economy does. Stock traders tend to want to know about the future more than they do the current economic picture.

In the last few days the stock market has blown throw the lows of late last year and then cut like a knife through the lows of 2002 associated with the post 9/11 recession. We are now trading at levels that haven't been seen since early 1997. Twelve years of stock market gains wiped out in just a year and four months, that's just how quickly things have turned south.

What should we make of the stock market's action in the last few months? I think the primary thing to take from it is that many of those who have the most power to move the stock market do not believe that anything that government has done in the last few months is making any real difference in the economy, and they are beginning to wonder if and when it ever might. In fairness to the government, while some of the things passed haven't been the best plans, they knew something needed to be done and we have no idea how bad things could have been without any kind of economic aid.

The fact that the stock market is predicting a lot more pain for the economy is very concerning though, given just how bad things are already. It has gotten to the point that those with the most gloomy predictions are even being stunned at how bad things are going. The clear message that is being sent is that we should batten down the hatches and prepare for the worst, because it doesn't appear there is any light showing up in the tunnel right now. Eventually things will turn around, but don't jump the gun and assume any stimulus or government plan will be the saving grace that turns things on a dime, because it isn't going to happen.