Since when has the stock market been a reliable indicator of the overall health of an economy?
How much does the state of the economy really matter to stock market performance?
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Myth-Busting: The Economy Drives the Stock Market
By
Nicolas Rabener
Posted In:
Drivers of Value,
Economics,
Equity Investments,
History & Geopolitics,
Performance Measurement & Evaluation
Introduction
Switch on Bloomberg TV or CNBC at any time of the day and there is a good possibility the host will be explaining the daily ups and downs of the stock market as a function of the latest economic news. Unemployment is down, stocks are up. Inflation is up, stocks are down. And so on. The underlying assumption is that the stock market represents the economy. Yet most economic data is released on a quarterly basis, and on many days there isn’t any significant news. So, what do stocks trade on on those days?
And what about when the stock market gets carried away? After all, too much investor enthusiasm led to
technology bubbles in 2000 and 2021, for example. While economic growth was strong during those times, in hindsight it hardly justified such sky-high returns and valuations. So, how much does the economy matter to the stock market? It may be that sometimes it matters very much and at others time much less. Let’s explore.