Why Stocks Are Up When the Economy Is Down

Supply and demand are a big part of it.

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Home sales are down, economists' forecasts are pessimistic, and consumer confidence is the lowest since 1982. So why are stocks going up?

Strange as it may sound, says Kevin Depew of Minyanville, "the economy and the stock market are two different things. That's why it is important to consider long-term economic issues within the context of short-term movements in supply and demand."

Depew says demand is driving the stock market in the short term, "but if you listen closely to what companies are saying, there's little reason to be encouraged longer term by what's happening in the broader economy," he says.

So what gives? "We believe it means we are simply in a counter-trend rally driven by a reversion of excessive negative sentiment. Put more simply, people are relieved the entire economic system did not collapse on the back of the (ongoing) debt bubble. However, once this condition of relative relief is, well, relieved, we face a darker reality in the second half of the year."

Of course, there's also talk about a rebound in the second half of the year. Some analysts are saying that the bears are too negative, and a senior Treasury official said yesterday that he sees an improving economy in the back half of 2008, citing fiscal stimulus and "positive" signs in the credit markets.