Does a Strong Economy Mean a Strong Stock Market? 

 

As we mentioned in our December newsletter, stocks limped into the end of 2024 after a strong year overall.  Due to a series of strong economic data, including continued strength in the unemployment rate, higher-than-expected wage growth, and faster-than-expected GDP growth, the Fed doused some of the market hopes for significant rate cuts in 2025.  

 

 

 

 

Why? Because high employment, rising wages, and a growing economy typically leads to more persistent inflation, and the Fed believes that higher interest rates help offset some of that pressure.  Because of this, we’ve seen strong movement in the US dollar and US interest rates indicating higher expectations of US growth in the future.  

 

 

 

 

 

 

 

 

This creates an environment in stocks that can seem strange to some, where what sounds like good news ends up driving the stock market lower, causing some to question, “What the heck is going on?”.  

 

See, the stock market is made up of many types of investors.  Some investors, like our clients, have wealth in stocks for the long term and have long term views of what those stocks are there to provide.  On the other hand, some investors are looking to get in and out of the market on a short-term basis to make money.  For the latter group, whether the Fed is going to cut rates or if inflation is higher than expected could truly impact their approach, as they buy and sell with the goal of making short-term profits.  For the former group, the short-term gyrations are less important than the long-term earnings power of the investments they own.  Because of this, there are times where strong data that might be positive for a long-term investor may not serve the same purpose as the short-term investor, which creates volatility. 

 

We ultimately believe that a strong economy, even one that brings modestly higher inflation and higher interest rates, isn’t a reason to sell stocks.  In fact, high employment rates, growing incomes, and increasing productivity should be seen as a good thing for the earnings power of private businesses.  We think that this recent downward volatility may prove to be a buying opportunity over time.  

 

In fact, the recent CPI release last week provided a sigh of relief, as inflation came in cooler than feared, sending interest rates and the dollar lower, and stocks higher.  While short term fluctuations can feel unsettling, staying invested and focused on the bigger picture is key to building wealth over time. 

 

 

 

 

 

If you’re feeling uncertain about how recent events impact your investments, we’re here to help. Let’s talk through it and make sure your plan stays on track.

 

 

Thanks For Reading! We Hope To See You Again!

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Advisory services offered through National Wealth Management Group, LLC, a Registered Investment Adviser. This information is intended for educational purposes and is not intended as a recommendation to buy or sell securities. Investing involves risk. Before investing, you should consult with a financial advisor to determine how a specific investment strategy fits your personal goals and objectives.