Irrational Assumptions

This morning I saw economist Larry Kudlow on CNBC once again telling us the markets would turn back up at some point because the economy is getting better. Kudlow is a smart man, and I pay attention to his thoughtful style.

But in this matter he is dead wrong. Over the past few weeks, I think I have made the point that the connection between a growing economy and the stock market is tenuous at best, and sometimes non-existent. A growing economy and a rising stock market co-exist in a secular bull market cycle. It is a virtuous circle. But in secular bear markets, growing economies are not reflected in the stock market.

Quick repeat history lesson: the economy grew twice as fast from 1966 to 1982 as it did from 1982 to 1999. Stock went nowhere in the first period and rose ten times in the latter. You simply cannot make the case that a growing economy will result in a growing stock market.

Over the long term, value drives the stock market, even as emotions such as fear and greed move it on…