One of the questions we get asked all the time is “what is the difference between the market and the economy?” The question is a source of confusion for many people. You turn on the TV and see the market is going up, then see it’s going down the next day without knowing how or why.
Think of someone walking their dog across the park. The person walking the dog is the economy, and the dog is the market. Sometimes the dog chases the tennis ball; sometimes it runs and barks at a squirrel. The key is to not watch the dog but to watch the person in control of the dog. The owner’s job is to guide the dog through the park the same way the economy is meant to guide the market.
The stock market is a reflection of our economy. If our economy is suffering or soaring, it will translate in the market. According to Larry Swedroe of CBS News, “the big difference between the market and the economy is that the market is forward looking, and it’s unexpected events that primarily drive future stock prices.”1
Investopedia defines market value as “the price or amount that someone is willing to pay in the market.”2Economic value is “the measurement of the benefit derived from a good or service to an individual or a company.”2 In other words, the market is based on how much we spend on products, and the economy derives from the value we get from those products.
Many people rely on the market for much of their retirement income through a 401(k) or annuity without understanding the relationship between the market and economy. While no one can predict the market, it is important to speak with a financial professional who can guide you when navigating your financial future. Find someone who can clear up the confusion you may have in retirement planning.
Remember not to watch the dog. Watch the dog walker. Having the help of a financial professional is also a great resource to have for your retirement plan. Let’s keep our eyes on the economy, cut out the emotion, and move this park smoothly and confidently.