During the pandemic, the steady rise in the stock market has to be the most surprising factor. Despite the unstable condition of the US economy, the stock market has gained nearly 60% to the recent levels above 28,650. There was a steep fall of 38.7℅ in the US economy, for the April- June quarter. This illustrates the disconnect between the stock market and the economy. It also breaks the myth that investment in the stock market is regulated by degree of underlying economic growth.
In recent review conducted by the Wharton Business School, a range of economists, finance experts, and academics gave their assessment of the reasons for this discrepancy.
Why the stock market and the economy are not comparable
In general, the stock market is different from the economic structure. The stock market provides a futuristic outlook. It projects the expectations of people from the economy rather than analyzing the current condition. The economy emphasizes the existing conditions regarding employment and unemployment, labour cost, output etc.
The stock market is an assemblage of firms. Those firms need not necessarily represent the whole economy. Let us elaborate further on these topics to understand the inverse proportionality between the stock market and economy.
- The real economy is not limited to the firms in the stock market only
Big tech companies like Google, Netflix, Amazon, Microsoft etc have stocks high in demand. And these tech giants have not suffered an economic backlash during the pandemic. Rather, many of these digital platforms gained customers and subscribers due to the pandemic situation. They benefited from the need for delivery rather than in-person purchases and they benefited for the need for online rather than in=-person communications. The pandemic has been a boon for big tech.
They may be dominating the stock market now but this handful of companies in no way represents the economy as a whole. Their contribution in the macroeconomic sphere is negligible. The reason is very simple. They did not contribute much to the employment sector. Rather, some of them cut down on the salaries and employees.
- Small industries or firms are not part of the stock market
An economy consists of both large and small firms. Often amidst the glory of the giants, we tend to ignore the impact of the small businesses. In this pandemic situation, small firms have been hit worst. They contribute to the output, employment data, and the overall economic structure. But many of them do not have shares in the stock market. And, thus, we do not get to see their impact on the same. The stock market provides a different world for its followers.
- Stock market guides you towards the future. It is visionary
It rarely happens that there is a relation between the growth of the economy and the stock market. The economy is all about depicting the current growth in production, employment etc. The stock prices usually predict something which has not yet happened. The shares in the stock market determine the growth of a certain company in the wider market.
- Recently there have been more investments in the stock market
Since 2019, there were approaches to induce liquidity in the financial market. It would ultimately help to avoid any kind of financial crisis. But only during the pandemic, did the Federal Reserve start investing in bonds and shares. Purchases of mortgages and treasuries have increased. The Fed has announced a stimulus package for the purchase of securities along with new credit facilities. This has resulted in a hike in prices of shares. The Fed has very skillfully engaged regular investors and gained the attention of the new ones to put their money to use.
Gains in the stock market prices have led to inflation in the economy. But experts think that the US economy will gain back at least 20% of its momentum after the lockdown is over.
Understanding these distinctions is essential for the growing number of independent traders. Viewing and understanding the stock market has become accessible to everyone, in real-time, with the expansion of online trading tools. There are a range of excellent trading apps in the UK market. While big tech and the pandemic continue to disrupt the business world, the rise in independent trading looks like some kind of rebalance for the small guy.
Let’s check the most important reasons which encourage the boom in the stock market.
- Long-term growth – You have got the simplest reason to invest in the stock market. Here, money grows by at least 10% per year for any long-term investment. If you become a smart investor, you can crack a long-term deal with the utmost profit. Most importantly, studies suggest that stocks usually have upward curves over the long-term, quite contrary to any other area of investment.
- Acing the race against inflation – Long-term inflation is an alarming condition. The stock market can be a way of preventing the loss of value of money. Sometimes the return rate is more than the inflation rate. Or it may happen so that the inflation rate is equivalent to the return you would be getting, which means it would be an equalizer.
- Crazy Compounding – Basically, here, you do not require a lot of money to make money. Compounding ensures a steady return and the amount is sufficient to in turn ensure long-term profit. There are stock recommendation services and charting tools to help you at every step. This makes your understanding of the market easier, making you self-sufficient.
- Fixed and Lower Interest Rates in Banks – We know that the economy is suffering worldwide, mostly due to the pandemic situation. The interest rates in banks are hitting new lows every day. So, your cash in hand or savings has a chance of stagnation of value or even devaluation. If you choose to invest in the stock market instead, it will at least keep the cash flowing. Moreover, you can also opt for tax-free investments in the stock market, such as ISAs.
These suggest how the stock market can or has become a useful way of increasing money. But above all, what you need is patience and perseverance to thrive the slight market changes.
As a would-be trader, there are clearly opportunities to be had in stock market investment. However, caution, restraint, and extensive research are vital if you want to generate long-term wealth.