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Why Isn’t The Stock Market Improving With The Economy?

Believe it or not, there is good news about the economy this year. Despite American workers paying 2% more in payroll taxes, consumer spending in January 2013 was roughly the same as the year before.

The housing market is slowly coming back to life since the subprime mortgage crisis and the recession that followed. Overall, U.S. consumers are not jumping for joy yet, but their confidence is definitely rising. So, why is it that the stock market, which started strong in January of 2013, seems to be limping along less than a month later?

Fear of Government Changes

The political climate of Washington, D.C. has many investors nervous. There have been signs that some politicians are pushing for interest rate hikes and other budget tightening measures that would cause stock prices to drop. Even though the U.S. government has not formally announced anything, many investors are cautiously waiting to see what happens next.

Congress may have brought us partially back up from the fiscal cliff with some compromises, but many other economic policies that are under discussion have not been resolved yet. Many investors want to see how the politics play out in D.C. before making any big moves.

The Dow Jones

The Dow Jones Industrial Average is staying just a bit short 14,000 as of late February 2013. The all-time high, reached in fall 2007, was 14,165. While one would think this is good news, a vast majority of investors do not feel that the economy is strong enough to return to that high level any time soon.

Some high-profile investors feel that government policies have caused stocks to become over-valued and as those policies are stripped away, prices are going to drop. Even though the numbers indicate the stock market is doing well, many investors believe that the average is a misrepresentation of actual market conditions.

Investors React Differently

Stock investors do not always follow the same trends that consumers do. Investors and consumers are looking at the economy from different points of view. Sometimes bad economic news panics investors into thinking that the Federal Reserve will come in and make sweeping changes to improve the economy, so they rush to the market in hopes of being “grandfathered in” before the changes take effect.

On the opposite end of the spectrum, policies like quantitative easing could come to a premature end if the Fed thinks the economy is doing well on its own. What sounds like good news to the average person, may seem like bad news to an investor.

There is no doubt that the unstable political climate in the United States is affecting the stock market. Consumers may have more confidence, but investors do not.

The ties between government and businesses are so deeply entwined now that investors know that big policy changes in one area will inevitably shake up the other. Right now, many investors are taking a “wait and see” approach; which means the stock market may continue to improve slower than the rest of the economy.

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