What the market plunge is saying about the economy

Economy may not be as bad as it looks

As stocks endure a brutal beginning to the year, a scary question is echoing across Wall Street: Is the stock market, which is typically seen as a forward economic indicator, saying a major American slowdown is nigh?

Howard Marks of Oaktree Capital Management posed the question a bit more pointedly in the most recent of his famous memos: "Is the market smart, meaning you should take your lead from it? Or is it dumb, meaning you should ignore it?"

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For Max Wolff, chief economist at Manhattan Venture Partners, the recent drop in stocks somewhat overstates the economy's problems — but that doesn't mean the former isn't justified by the latter.

"The economy doesn't look as bad as the stock market right now, but that's a flip side of the fact that the stock market has looked a whole lot better than the economy for about six years," Wolff said Wednesday on CNBC's "Power Lunch. " "We do think the market got out well ahead of the fundamentals, and now they're violently recorrecting back closer to where they should be."

The biggest concerns right now emanate from China and the commodities space. Chinese economic growth appears to be slowing, and a continued plunge in the price of oil and other commodities is bringing up scary questions about the "systemic" risk for the economy as a whole.

For Boris Schlossberg of BK Asset Management, the market is indeed telling a dire truth about the state of the world.

"We don't have a 2008 scenario, but we definitely have a very serious slowdown in front of us, and I think the market is looking at that and doesn't like it at all," he said on "Power Lunch."

For Marks, however, building a narrative this logical around short-term market fluctuations risks giving traders too much credit.

"It seems clear to me: The market does not have above-average insight, but it often is above average in emotionality. Thus we shouldn't follow its dictates," Marks wrote.

"In fact," he added, "contrarianism is built on the premise that we generally should do the opposite of what the crowd is doing, especially at extremes, and I prefer it."