Originally Posted by NW Ponderer
Our overreliance on "stock prices" to determine the "health" of the economy has always troubled me, particularly as it is based upon a premise of constant expansion - anything less is considered "unhealthy." But the stock market is a pretty crude barometer of economic health, especially as it misses most of the most important aspects of what the average person considers important: e.g. cost of food and fuel, employment status, wage status, etc, and instead relies on "feelings" and "expectations" about the market rather than fundamentals underlying it. "Booms," "bubbles," and "busts" exaggerate the importance of the market to the overall health of the economy.

While I agree that the stock market does not show the health of the economy as a whole, you'd be amazed at how little it misses. Stock prices of every company are traded on a bid/ask system and readily available information is incorporated into the stock prices with amazing speed. I forget where I read this number but information about the economy as a whole as well as company specific news for the S&P 500 companies is incorporated within the price in less than 10 seconds of the news hitting the public. Now, the public is not prevy to all information about a company as soon as it is available to 'insiders' of a company thus there are restrictions on the kind of trading an 'insider' can do.

While you might think that the price of a stock like Apple might not have anything to do with the economy as a whole, like food prices or natural resources prices (oil) or employment you'll be amazed at how much it does reflect those issues as well. While a change in oil is not going to affect that stock as much as GM, it wills till feel an affect. Investors are aware that if the prices of raw materials will eventually be passed onto the consumer, thus less money is available for luxury items and people will buy less of Apple's products and services.

Some stocks move in direct correlation with the market, some are affected more than the market while some are inverse to the market.

Since the world economy is no longer on the 'gold standard' the world economy 'works' on the belief that the major world currencies and economies are 'fail-proof' (you can debate that but that is the underlying belief otherwise sane people would no longer invest in it). A 'sane person' in economic terms is a person that will only invest if the expected return is higher than the cost (the person can be legally insane otherwise grin )

Last edited by kap17; 08/18/08 06:56 PM.
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