Is the economy improving, or isn't it? I've been asked this question quite a few times in recent weeks. So I thought I'd share my answer with everyone.
The stock market is going up, yet unemployment continues to grow. Are things getting better, or aren't they? The answer, as usual, is a bit more complicated than most would like.
Can the economy get worse and business get better? The answer is yes. Here's an example of how that happens.
Suppose you have three companies that dominate an industry, each with about 1/3rd market share. Then suppose that the market shrinks by 20%. Those companies collectively layoff 20% of their employees and overall business is down 20%. They're all losing money. Now, the weakest of the three goes out of business. That leaves 80% of the orginal market for the two survivors, who each now get 40% market share. They've grown by 7% of the market. That's actually 21% growth (7% divided by 33%). And since they had leaned themselves out through layoffs, they're actually likely to be even more profitable than they were before. And even if they start to hire some people back, the overall industry is still down 20%, so all those jobs won't be replaced. The stock of those two companies goes up. And unemployment continues to grow.
And there's another thing about survivors--they stay in stock indexes, while those that die do not. Take the Dow Jones Industrial Average, for example. GM has been pulled out. So has Citigroup. They were recently replaced by CISCO and Travelers. So does the DOW really reflect the perfomance of the market over the past year? Over the past 100 years? No! Because as weak companies are pulled out and stronger ones put in, the DOW (and every other index) always overstates the market's performance over time because of this survivor dynamic.
Beware the numbers. They don't lie...they just don't tell the whole story.
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I saw a Senator claim that the Healthcare Reform Bill will make the public option prevention based...guess that means reimbursement for supplements & gym memberships.
Now that's progress, if you ask me.
Posted by: Car Insurance Performance | October 07, 2009 at 07:17 AM
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Posted by: Rob | October 25, 2009 at 11:18 AM
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Posted by: Exhibitionconflict | December 27, 2009 at 12:09 AM