Stocks do go up in bad economies. They go up because the market is anticipating growth in the future. Bad economies tend to reduce competition, lower interest rates, keep costs down, spur innovation, rationalize capital structures and reduce leverage. That is a recipe for future growth, as long as companies have access to capital. The question is, what happens in a mature economy that does not grow, or continues to shrink as consumers deleverage and continue to lose employment? Put differently, if stocks discount the future, what if the future economy is bleak? The answer is that no matter how bad our economy is, with high unemployment, unmanageable government debt, deferred investment, corruption and a poorly educated workforce, the companies that do business here are here to make money, so however they can do it, they will. They will cut costs, innovate, access economies that are stronger, access capital markets, buy and sell until they can grow. The secret sauce is a fluid capital market. As long as companies can sell equity and borrow money, the stock market will ultimately prosper, even in a devolving economy.
Nick Stonnington has been a wealth advisor since 1983. He founded Stonnington Group in 2004 to better serve clients by offering them a platform for independent fiduciary advice. The Stonnington Group team manages client investments and advises on their businesses.
Nick was ranked #1 in Los Angeles by Registered Rep Magazine in 2002 for "America's Best Wealth Advisors." Nick's expert commentary has been featured in such publications as the Wall Street Journal, Los Angeles Times, New York Times, Investment News, and Investment Advisor. His research has been published in the Family Wealth Report and he has written articles on investing for numerous industry journals.