The Dow primarily measures equity strength, whereas the broader economy—in the short run—is more influenced by a combination of growth in jobs, real income, and consumption.

However, the performance of the DOW does influence long run economic growth by encouraging and providing more saving and investment resulting in higher productivity—essential for raising and sustaining economic growth. Apparent gains are an illusion of nominal value, but in fact losses when adjusted for inflation. In other words, inflation has wiped out any seeming gain of asset or income value.

The stock market in the past has been a leading indicator, but that leading quality has weakened in recent years. Stock prices are driven by profits and profit growth. During the Great Recession, corporations have been able to maintain profitability by slashing employment to reduce costs. They have streamlined their operations and have squeezed more productivity out of their remaining workers.

That said, I do think the economy is on an upward path, with job growth of about 2 million expected for the national economy in James Hamilton, University of California San Diego. One reason for the rise in stock prices since October has been an improving U.

But another even more important factor may have been the drop in interest rates, with the yield on year U. Treasury bonds down from 3 percent last summer to 2 percent today. As conservative fixed-income assets have become less attractive, investors have been forced to turn to stocks, many of which still pay a dividend significantly better than the yield on year Treasuries.

Lower interest rates are one factor in the stock market surge, but lower interest rates do not signal that the economy is on a sustainable upswing. Stock growth may only mean that there is a lack of better investment alternatives for investors.

What are the most common market indicators to follow the U.S stock market and economy? | Investopedia

The Dow is only a narrow measure of a few stocks --and even fewer larger investors-- who can easily skew results. The Dow frequently swings percent in a day. Dow checked it daily. There are some good values in the stock market based on company earnings and investors are seizing the opportunities.

The Stock Market as a Leading Indicator: An Application of Granger Causality

However, many corporations are still holding off expansion plans and hoarding cash, unemployment is still above 8 percent, and we have not been re-creating enough new jobs to sustainably recover. The economy is doing well despite Europe and despite oil prices. Employment keeps growing which is the key thing to watch. Certainly the stock market is one indicator of confidence in the economy, but one reason the stock market is doing well is that people are afraid of fixed-income bonds and so your choices are money market funds no yield or stocks or alternative investments like real estate.

So, don't expect a steady runup in stock prices. They will be volatile this year. Still, overall they show some confidence in the ability of U. The Fed has kept its short-term interest rate target close to zero for three years and indicates that no change may take place for another three years or more.

Its pumping of money into the economy and purchase of financial assets has driven long-term interest rates sharply down as well. Investors seeking better yields have migrated to stocks, while many companies have used their cash stockpiles to buy back shares.

Although various economic reports have been better, oil prices, Europe, China, home foreclosures, and government deficits all could derail a sustained upswing in both economic growth and the Dow Jones. Crossing 13, on the Dow is purely psychological, especially since the price-weighted Dow, which only contains 30 stocks, is not a good measure of stock market performance.

Stocks usually rise before the economy hits bottom in a recession, and it is rare for the economy to fall into recession without the market falling first. So the continuation of the bull market, which started in early , is a good sign that the economy will continue its recovery.

Is Dow a good indicator of US economy? Now that the Dow Jones industrial average has closed above 13,, an all-time high is in sight — just 1, points away. But the coast is not quite clear for the markets or the economy.

Leading Economic Indicators Predict Market Trends

Roger Showley Contact Reporter. Does the Dow Jones average topping the 13, mark for the first time in four years signal that the economy is on a sustainable upward swing? Yes 3, No 5 Marney Cox, San Diego Association of Governments Marney Cox. Kelly Cunningham, National University Systems.