Saturday, May 9, 2009

Stock Market: The Barometer of Economy's Health


Stock markets are barometer of the economy's health & prospects for the times to come. Markets are nothing but a decisive way towards collective trend of thinking of its participants. The market trend specifies the direction of thinking, regarding optimism or pessimism, in the mind of the market participants. Likewise, a volatile market reflects intense fluttering of ‘UNCERTAINTY’ in terms of whereabouts of forces that dictate market trend.

Stock markets are usually ahead of the ground realities like actual GDP performance and Economic conditions of the country. Like, for instance, the Indian equity markets started plummeting from the early part of the calender year 2008 around the month of January, whereas the worst was experienced by the actual economy in the later half of the same calender year 2008 around the quarter October to December of the same year.

Due to this specific nature of market's tendency of estimating visibility into the future, the movement of the equity markets are based on estimates of the company's future earnings prospects and visibility. That is the reason as to why market's shall often forgive the disappointing performance of company in current period of contention, only if its future earning prospects is healthy and clear.

4 comments:

Faisal said...

I would partly agree with this theory that stock markets reflect the health of the economy or are an indicator of the same...

The reason is that the stock markets can easily be propped up...Thats what governments around the world are doing...putting so much money into the system that everything goes up...this is a very easy way of making markets go up...

So if governments go on putting money into the system then you can be assured that markets will go up even if the economies dont recover for years...This is more true for the western world then for Asia...

Just as you said markets move ahead of the economy...in 2007, the year before the crash the markets moved up 50%...that was not discounting any great thing in the future...it was just ample liquidity in the system...

So in my opinion markets are more a function of liquidity then anything else...hence its banks and governments that move the manipulated markets more then anything else these days...

Viral Rajnikant Dholakia said...

Thanks Faisal...for your Analytical comments.

As you said, markets can be manipulated over short-run but over longer horizon fundamentals take the front seat and markets adjusts its key valuation parameter in lines with its fundamentals.

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