Overstating the importance of the stock market

Felix Salmon of Reuters was on CNN’s “Reliable Sources” Sunday morning to talk with host Howard Kurtz about coverage of the stock market in the wake of the downgrade of the U.S. government’s debt.

Here is an excerpt:

KURTZ: Did the press kind of miss the boat here? Because there were all those headlines, “11th Hour Compromise,” “Deal is Done,” “The Crisis is Over,” and then, suddenly, it seems like the real economy was sending a very different message.

SALMON: Well, let’s not confuse the stock market with the real economy. The stock market is not the real economy. The stock market is a bunch of traders who are all trying to make money. And frankly, in mid-August, most of them are on holiday anyway.

And it can gyrate. It can go — it can get volatile. You get a news event like the downgrade, and stocks can move up and down.

I think it’s very easy to overstate the importance of that. And it’s very important to remember that what happens in the stock market is not some kind of referendum on what’s happening to the economy as a whole.

KURTZ: Well, I suppose a partial rebuttal to that would be that in this age of 401(k)s, that a lot of people are at least indirectly invested in the stock market. But let’s come back to your —

SALMON: Well, no. Let me add on to that, because it’s important. If you are investing in a 401(k), you actually want stocks to be cheap. If you aren’t retiring tomorrow, if you’re still putting money away, month after month, this is like — you know, if stocks go down, that’s good for you because it means you can buy them more cheaply. This idea that stocks falling is always bad and stocks rising is always good is incredibly simplistic, and it’s not actually true.

KURTZ: So is this a fatal miscalculation in terms of the media coverage? Because it’s hard to cover the whole economy, so we have this snapshot. The Dow went down 680, the economy is tanking. Are we really making too much of these gyrations and these market indexes?

SALMON: Absolutely. You know, the Dow went up over the past couple of years. It went down a bit.

You know, I think people concentrate far too much on what happens on any given day. And the fact is that if you’re investing for a period of 20 or 30 years, what happens on any given day is completely irrelevant.

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