Stock Markets Are Leading Indicator

Dear readers,

A lot of people had asked me - Since every other day we heard and read reports that so-and-so bank is failing, why are you still investing in the stock market?

This is because stock markets are leading indicator. Which means, what you are seeing now (like bank failures, credit tightening, slowing economy, recession etc) are the outcome of this crisis. These events are the effect of this crisis, and not leading to this crisis. Bank failures doesn't lead this crisis. Slowing economy doesn't lead this crisis. This crisis started long before that. Therefore, the events that you are reading in the news and papers are in fact lagging indicators.

Since stock markets are leading indicators, one should not be afraid of investing in the markets when there is bad news all around. Because the valuation of the stock market would have reflected all these bad news by now. What we are concerned are signs of recovery, not effect of this crisis. Once there is a sign of recovery, the markets will rally even if the economy might not be in good shape. And if you wait until then, you might have missed the boat.

What should an investor do then? The key is to stay invested at all times and ride out this crisis. Try not to monitor the markets every minute because it is stressful and not productive. Have a diversified portfolio, continue with your investment plan and sleep well at night.