What does "Goldlocks" have to do with stocks?

Question

I've posted a similar question before, but didn't get a satisfactory answer. What does it mean when they speak of Goldilocks in reference to the Stock Market?

Answer 1

The term goldilocks is used to describe an economy that is growing at a moderate and sustainable pace. If you recall in the story of Goldilocks and The Three Bears there is a scene in which she tastes the 3 bowls of porridge and one is too hot and one is too cold, but the last one is just right. Well that last bowl of porridge describes a goldilocks economy. If an economy is too hot, inflation may become an issue and the Federal Reserve may have to raise interest rate thus stifling the economy (if they overshoot). If an economy is too cold, consumer spending might slow, companies might have too much capacity on hand, their inventory levels might build and job cuts may be warranted and so on and so on. But in a goldilocks economy growth is at a moderate pace (3-4% GDP - that might be up to debate), there is plenty of jobs out there and consumer spending is growing at a nice clip. This is an mass oversimplification. There are endless factors influencing the economy. So in other words Goldilocks is a term used in reference for an economy and the stock market in itself is a derivative of the economy. So I really didn't answer your question, but I hope that next time your hear the phrase "Goldilocks Economy" from the likes of narrow minded Larry Kudlow on CNBC (JMHO), you'll know what he is talking about.

Answer 2

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Answer 3

It means that economic conditions are "not too hot; not too cold; but just right."

The economy has a growth rate that is tied to the rate of productivity increases, workforce size, etc. If it grows too far above that acceptable rate (too hot) then we run the risk of inflation. If it grows too slowly (too cold) then we run the risk of recession. When the growth rate falls in the sustainable area where economists think it should be, then it is "just right".

The growth rate directly influences the stock market. When the economy is too hot, stocks run up quickly in value, but can get too expensive, resulting in a stock market crash.

Likewise, when the economy is too cold, stocks lose value.

Ideally, when conditions are "just right" (the Goldilocks economy) stocks can move ahead at a sustainable pace.

Hope this helps.