Economy crash =/= stock market crash?

Type_45

How connected are national economies, and indeed the global economy, with the international stock markets? 

I've heard it said that the stock market does not reflect the economy.

Additionally, wealthy people and institutions, including pensions etc, have to put their money somewhere, so this will presumably mean that stock markets will always have investors and will ultimately keep going up.


Disclaimer: this is notwithstanding the fact that Lloyds, BlackRock and other financial institutions are buying up residential properties at a rate of knots, which perhaps doesn't bode well for the stock market going forward...

sevenhills

Type_45 said:

Additionally, wealthy people and institutions, including pensions etc, have to put their money somewhere, so this will presumably mean that stock markets will always have investors and will ultimately keep going up.

Investments are international these days, perhaps low world interest rates have pushed up stock markets?

A crash often has an element of confidence, so once there is a small move downwards, people will get nervous. There seems to be more talk of a crash in recent weeks/months, but the employment rate is kept low by furlough, it's still people not working though.

dunstonh

I've heard it said that the stock market does not reflect the economy.

Correct.  Markets have crashed during positive economic periods and grown during negative economic periods.

jimjames

dunstonh said:

I've heard it said that the stock market does not reflect the economy.

Correct.  Markets have crashed during positive economic periods and grown during negative economic periods.

The last 12 months are a perfect example of that

Type_45

jimjames said:

dunstonh said:

I've heard it said that the stock market does not reflect the economy.

Correct.  Markets have crashed during positive economic periods and grown during negative economic periods.

The last 12 months are a perfect example of that

Printed money ends up in assets. 

Notepad_Phil

Type_45 said:

I've heard it said that the stock market does not reflect the economy.

Certainly true when talking about the short term but not so true when talking about the long term.

Type_45 said:

Additionally, wealthy people and institutions, including pensions etc, have to put their money somewhere, so this will presumably mean that stock markets will always have investors and will ultimately keep going up.

Personally I wouldn't invest in something just because others are also investing in it - e.g. bitcoin is one example of how people can always find something new to 'invest' in. I invest in stock markets for other reasons and so am happy to ride the ups and downs and stay long term invested.

Thrugelmir

Type_45 said:

jimjames said:

dunstonh said:

I've heard it said that the stock market does not reflect the economy.

Correct.  Markets have crashed during positive economic periods and grown during negative economic periods.

The last 12 months are a perfect example of that

Printed money ends up in assets. 

The economic policy of the Western world since the end of WW2 has been inflationary.  The level of debt keeps on growing though. Biden's spend spend spend policies may have a longer impact on the value of the US $. Proposed tax rises on corporations and wealthy individuals aren't sufficient to fund his plans. 

barnstar2077

The stock market seems to just be a reflection of how the future of the economy is perceived.  So, because people thought covid 19 would blow over after a vaccine it rebounded pretty quickly.

Which reminds me of one of my old bosses.  He told me once that his girlfriend accused him of cheating, and that he had said to her "Prove it, you haven't got any evidence!"  Strangely, this did not convince her.  Perception is everything. 

Steve182

Sometimes there is very little correlation between the performance of an economy and that country's stock market. 

A few months ago I compared growth of US economy, UK economy and Chinese economy over the past decade using worldbank data to see how they compared.

Compound economic growth from start 2010 to end 2019 -

UK 20.3%
USA 25.3%
China 109.6%

Over that period the Shanghai composite and FTSE100 basically went nowhere. Other UK indices faired somewhat better, but were hardly spectacular compared with the S & P 500, which tripled in value during that period despite fairly mundane economic growth. 

So my conclusion is there is sometimes no correlation!

Thrugelmir

Steve182 said:

Sometimes there is very little correlation between the performance of an economy and that country's stock market. 

A few months ago I compared growth of US economy, UK economy and Chinese economy over the past decade using worldbank data to see how they compared.

Compound economic growth from start 2010 to end 2019 -

UK 20.3%
USA 25.3%
China 109.6%

Over that period the Shanghai composite and FTSE100 basically went nowhere. Other UK indices faired somewhat better, but were hardly spectacular compared with the S & P 500, which tripled in value during that period despite fairly mundane economic growth. 

So my conclusion is there is sometimes no correlation!

The major indices aren't a reflection of the domestic economies though. The FTSE 250 has a trailing annualised return over the past 10 years of 9%. FTSE UK Small Cap and FTSE UK Small Cap excluding investment trusts are even better. 

sevenhills

The FTSE 100 and all share were down 1.9% on Friday, is there a reason for that?

I didn't see any news reports, maybe a result of a weaker government after their loss of Chesham and Amersham?