By Tom Bradley

Between a vacation at Crystal Lake and some business travel, I’ve had lots of conversations about the state of the Canadian economy and the stock market. Invariably, it’s assumed that the two are connected. The weak economy is causing, or will cause, a pullback in the market. Cause and effect.

As we’ve written many times in this space, we should never assume the stock market is tightly linked to the economy. Mr. Market looks forward. He’s not reading today’s news, but rather attempting to read the news 12-18 months from now. For Mr. Market, today’s tweets and headlines are so yesterday.

But let me take the disconnect a step further. As investors who live in a small country (population) with a small economy and small stock market (capitalization), we have to be especially careful connecting local conditions to what’s happening in our portfolios. Stock markets are overwhelmingly driven by (future) economic activity (and ultimately corporate profitability) in the big countries/regions of the world, as well as capital flows from players multitudes bigger than Canadian individual and institutional investors.

We also have to remember that our market is made up of companies that are global in nature. While our banks and retailers live and die with the health of the Canadian consumer, companies that produce oil and gas, gold, copper, fertilizer, auto parts, aircraft, dating services, software and engineering services are almost oblivious to what’s happening at home. Canada is an insignificant part of their revenue and profits.

Of course, there will be specific events in Canada that impact parts of our market in the short term (bank earnings, oil prices, takeovers, grocery wars, Blackberry), but the overall direction is determined by what’s happening elsewhere.

So don’t do what the media is so prone to do, which is to look for a simple ‘cause’ to explain a specific ‘effect’. Market moves are always more complicated than a single event, especially when its one that happens in our own backyard.