Separating Financial Illusion from Reality

by Richard Barrington

Whether you are looking for the right time to jump into the stock market, or simply thinking of changing savings accounts, planning your next financial move can mean deciphering a constant stream of economic and investment news. This often comes down to distinguishing which information represents economic reality, and which is more of an illusion.

Here are six widely followed economic indicators, along with an assessment of how much each represents illusion or reality.

1. New Highs in the Stock Market

This is often an illusion. For example, the stock market reached new heights recently not on the strength of record earnings, but because interest rates are unnaturally low. Think about it: According to the FDIC, rates on savings accounts recently hit an average of 0.07%, and money market rates were barely higher at 0.10%. Those paltry interest rates are forcing more and more people to consider the stock market, but if rates returned to the 4 or 5% range, much of this support for the stock market would disappear — unless company earnings had strengthened.

2. Company Earnings

That must mean company earnings represent economic reality, right? Yes, but with a couple of reservations. Earnings gains driven by top-line sales growth are a sign of fundamental business strength. Earnings gains due to cost-cutting reflect one-time moves that often can be detrimental to future top-line growth.

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