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Investing Blog Roundup: Why the Market Doesn’t Care that the Economy Stinks

This week Barry Ritholtz tackled the question of why the stock market is doing reasonably well when the economy, clearly, is not.

One critical point, as we discussed recently, is that the stock market and the economy are not the same thing. The stock market isn’t even supposed to reflect the economy. (Rather, the market’s value at any time is a prediction, not a reflection of current status. And it only reflects a prediction regarding publicly traded companies, which are only a piece of the broader economy. Further, it only reflects how profitable those companies are predicted to be, not anything regarding how well their employees — or, ahem, former employees — are predicted to fare.)

Ritholtz also points out that it’s easy to overestimate how badly publicly traded companies, on the whole, are doing. Many very visible sectors (e.g., airlines) are doing horribly, but if such sectors make up only a small portion of the overall market capitalization, how well/poorly they perform doesn’t have a very large impact on the overall market performance.

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