It can be easy to conflate the stock market and the economy, and we’ve seen this happen particularly over the past few years with the combination bull market and strong U.S. economy. People have begun to associate them together. But not only are they not the same thing, the relationship between them may not be as straightforward as many people think. Understanding how economic indicators and stock prices are related can be important when it comes to recognizing market opportunities. Particularly as we come to what may be a turn in the market cycle, understanding indicators and what they show us can help us to be prepared.

Stock analysts divide indicators into two main categories as they relate to stock prices and/or the economy:

• Lagging indicators: A measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend
• Leading indicators: Any economic factor that changes before the rest of the economy begins to go in a particular direction

Recognizing the relation between different indicators does not make it possible to predict the future, but it does help us better understand the environment. And it can prevent misunderstanding, which commonly occurs when investors mistake lagging indicators for leading indicators.

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