Looking at previous bear and bull markets, stock market investing seems to have an indirect relationship with the economy. An example is the market crash of 1929, even though it did not directly result to an economic crisis; it still accelerated the coming of the great depression in the 1930s.
However, not all activities relating to the stock market affect the economy. The daily movements of the stock market have little economic impact. Most major effects are observed especially during bear and bull markets.
Also, it is not guaranteed that a fall in the stock market performance will cause an economic recession. During the stock market crash of 1987, it resulted in a rise of economic state instead of a recession after UK lowered interest rates to stop its possible damage to the economy.
Reflection of economic state
For starters, the stock market acts as a reflection of the economy. Companies go “public” in order to raise money for business expansion, which typically results to a rise in the company’s equity. Since a good market performance can help companies rise, the economic state rises as well. The stock market doubles as an indicator of the economic health of a country.
For individual people, a fall on their market shares can affect their spending negatively. People tend to cut off on their expenses if one major source of income is severed, thus making up for the loss of money. Conversely, the same thing happens. When people find their investments booming, they gain such confidence of wealth that they spend their money freely. With minor market changes, this can be insignificant in the economy. But when it comes to a huge leap or fall on the market, these changes can make a huge economic impact.
Effect on pensions
People who have saved up pension funds are usually affected by the stock market. As a rule, it is a good plan to invest the excess money in order to generate more. This goes well for pension funds, since they are supposed to be used several years in the future. Good investment returns can result to early retirement opportunities or higher pension payouts while a decline on investments can cause future pension payouts to be lower.
As said earlier, companies issue shares in order to raise money for expansion. Unfortunately, with falling markets, it is usually hard to find willing investors to buy a recently publicized company share or the lower share prices can result to difficulty in raising money. Again, this also happens conversely. A good market state can attract a lot of investors to buy even highly priced market shares, thus making fund raising easier for companies.
If the stock market is falling, investors usually look to move over to other types of investments. Government bonds, precious metals, real estates, etc. become attractive alternatives to allocate investors’ assets during times of uncertainty. This could generally be a good sign for the economic state of the said investments, although the reverse could be said about the stock market.
Read about the importance of financial investing.
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