Misleading as the sole indicator

Movements in the stock market can have a deep impact on an economy. A collapse in share prices has the potential to cause an economic disaster. We have all read about the Great Depression of 1929-1932 which was caused due to crashing of the Wall Street. Yet, every change in the share market doesn’t necessarily mean a change in the economy.

The stock market is not the real economy. It is influenced by factors such as confidence and expectations of investors, interest rates, price to earnings ratios, etc. The resultant of these factors might not always give the real picture of a country’s economic health. The 1987 stock market crash is one example wherein stock prices falsely predicted the direction of the economy. Instead of entering into a recession, the economy continued to prosper till the early the 1990’s. Also, stock prices predicted three recessions for the years 1963, 1967, and 1978 that did not occur. There is a saying: stock markets have predicted 10 out of the last 3 recessions. The rationale behind the statement is that stock market does not necessarily reflect the economy. Therefore, stock market is no doubt a good indicator to judge an economy but using it as the sole indicator for a nation’s economic health could be misleading. Other factors like gross domestic product (GDP) and gross national product (GNP) should be taken in account to get a better idea of the economy.