Article : If you are a stock market investor, you are living a life of contradiction and ambivalence. You have been conditioned to believe and react to the following paradox: What is good news for the country and its economy is bad news for the stock market, and what is bad news for the country is good news for the market. An excellent example of this enigmatic thinking can be found in the market's predictable reaction to the unemployment rate. When unemployment rises -- a situation that is undoubtedly bad for the country and disastrous for the five million of so jobless citizens -- stock prices reflect the market's delight. The financial headlines also reflect this.
Similar contradictions can be found every week when various economic indicators are reported, whether they are productivity, housing starts, capital expenditures or the balance of trade.
This topsy-turvy thinking is the product of an obsessive and singular fixation with one and only one concern: INFLATION! The fear that improvements in the economy may indicate -- or more accurately lead the Federal Reserve tovooyect hints of the dreaded word -- INFLATION, has become the exclusive driving force of whether the market is in an upward or downward trend. In fact, so much as a rumor that some obscure economic indicator may indicate the slightest degree of an expanding economy, catapults the market into a tizzy. It is as if the market no longer cares about employment, industrial investments or consumer spending. The economy and country be damned. All it cares about is what Alan Greenspan will think and do when he reads the latest economic report, in the fear that he will raise interest rates.
Taken to its next logical step, one wonders how the market would react to a precipitous drop in employment and a total collapse of the economy, such as a 20, 50 or 100% unemployment rate. Ecstasy?
Any investor over the age of 35 must remember the days when there was more to life than the fear of inflation. Those of us who were taught traditional postwar (that is WWII for those of you who never heard if the Big One) economic theory were instilled to believe that as the economy grew, so did the country's economic well-being. Indeed, the basic tenet of the federal government's economic policy was to foster growth. Recall learning about the acceleration and multiplier effect. Gasp! The government used to be in the business of stimulating the economy. Today, perish the teachings of anyone who would have the audacity to want a growing economy, for it may mean -- dare we use the word again -- inflation.
So today, economic theory is the opposite of what once seemed clear and logical. No longer is good news like growth and employment considered a good thing. Many of us are thus befuddled, and in our sentimentality, recall the days of yore when growth was the driving force of the market and country. Yes, this may have meant investment in industrial plants, increased consumer spending, and, God Forbid, increased employment. But at least it meant that good news was good news.
Sanford F. Young practices law in New York City. His practice concentrates in complex litigation and civil appellate matters, and his website is www.nylitigator.com.
