Is Stock Market the real instrument to measure the Economy?
Stock market performance has long been used as a barometer for the health of the overall economy. Nonetheless, sometimes the stock market appears in great shape when the economy is not.
At the most basic level, the economy is the production and consumption of goods and services. It encompasses all individuals, companies and the government.
One of the most widely recognized measures of economic activity is a gross domestic product, which represents the monetary value of all finished goods within a country during a specific time period. GDP essentially provides a snapshot of the economy’s size and growth rate.
Whereas the stock market is an exchange where the buying, selling and issuance of shares in publicly held companies takes place. Stock values are largely based on what is expected to happen in the future rather than what’s occurring right now.
Because the stock market is forward-looking, it explains why sometimes stock values are doing well despite the weak economy.
So the fact that the stock market is a leading economic indicator isn’t the only reason there’s often a disconnect between it and the overall economy.
That’s not to say that the stock market and overall economy are completely unrelated. What’s important to understand is that day-to-day market swings don’t reflect what’s going on in the true economy. Over the long-run, the stock market and the economy do tend to have a stronger correlation, but that gap between isn’t getting any narrower.