Sometimes people say the ‘stock market is not the economy’. This is simply wrong. The stock market is the economy and it’s lazy thinking to say otherwise.
First, take the US. The GDP of the country and value of the stock market are the same. Indeed if one is out of whack with the other, it is the best guide to what will happen to the net worth of companies going forward. So for those saying the stock market is a small part of the economy – they are wrong. An individual company is not the economy and not all companies are on the stock market, but to take a small corner shop and claim it is the economy or a family living in poverty and extrapolate is far more inaccurate.
Indeed, a common journalistic practice of vox pop extrapolation to appear ‘in touch’ with the masses actually paints a more inaccurate picture in attempting to extrapolate from three interviews to 70m people (the population of the UK).
Here is also why the stock market is the economy – yes the market index is at an all time high in say the Dow in the US, but of course the stock market as a whole rightly reflects bankrupt stock prices too like Hertz. Indeed, few better ways have yet been found to instantly tell someone what the economy is doing than the stock price of a company at that moment. Whether it is over exuberance (parabolic trends!) or disaster and worthlessness.
And if the stock market is not the economy then tell me, who do people work for? If not public listed companies then they are working for suppliers to those companies and if neither then they are paid by the taxes paid by those publicly listed companies or their employees or their suppliers and customers.
And if the economy is not the stock market then why in the United States, the world’s largest economy, let alone many others, do Central Bankers consider asset price inflation ie stock prices in setting interest rates? Because the stock market is the economy. It feeds it, lives off it, and its pricing mechanism gives a real time gauge of it.
But the stock market has the great advantage of looking forward. Like today. It rises when we are told of economic gloom because it looks forward at what the economy will be too. So it prices now what the economy is today and will be as well.
And do not forget your pension is invested in publicly listed companies – not Mrs Jones’s corner shop.
It prices today what is and what will be. Consider the alternative. It involves working out the economy based on purely historic figures eg unemployment 3 months ago. Well Covid shows how useless that is. Or surveys of say purchasing managers. Who fills a survey in a downturn? And surely nothing is better than where people are willing to put their money where their mouth is – ie a share price.
So, the economy is the stockmarket and vice versa. Perhaps we should say ‘it’s the stock market, stupid’.
