The Washington Post told readers that "Stock Sell-Off Spurs Fears That Slump Will Worsen." Among whom did it raise such fears? Anyone who bases their expectations for the economy on the stock market has no idea what the economy will do. As should be apparent at this point, the stock market can often be driven by irrational exuberance. Remember, it was almost three times as high in 2009 dollars back in 2000 as it is today. Did that make sense? Obviously if it can be driven by irrational exuberance it can also be driven by irrational pessimism. There is no obvious reason to believe that the market has suddenly become a better judge of the economy's prospects now than it had been in times past. Of course even in principle the market is not reflecting the economy but expectations of future profits. An announcement that the government will shut down Social Security in order to make Citigroup, Bank of America, and other banks fully solvent would probably send the market soaring, even though it would likely be really bad news for the economy. Of course there are grounds for thinking the economy is looking very bad. Recent data on existing and new home sales, durable good orders, and construction all indicate that the downturn will be even worse than most forecasts predict. But the public would be much better advised to make its assessments of the economy on economic data than the stock markets fluctuations.
--Dean Baker