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Is the Stock Market an Accurate Gauge of the Economy?  A UI Prof Says Yes

A finance professor at the University of Illinois says a recent modest recovery in the stock market is a true sign of a better economy ahead, even if it's a weak sign.

David Ikenberry says skepticism over whether the stock markets are an accurate barometer of the overall economy is misplaced. He says stock investors are concerned about looking forward and factoring in growth expectations, even if current news on other economic fronts -- such as unemployment or consumer spending -- is still bleak.

"To the extent that we see recovery, that we see some of those green shoots of a turnaround, you can see the stock market going up today, whereas unemployment actually gets worse," Ikenberry says. "And that's one of the puzzling features of markets."

Ikenberry believes the optimism mentioned by Federal Reserve chairman Ben Bernanke in an interview yesterday (Sun) was warranted. But he warns against interpreting day-to-day market swings, even though he says volatility in the markets has declined since last fall.

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