The Relationship of The Stock Market And Our Economy

The relationship between the stock market and our economy may seem to be interchangeable but they are different.  Our economy is improving while the stock market remains strong but inflation is increasing at a faster rate.

Relationship Between The Stock Market And Our Economy

Generally, the relationship between the stock market and our economy often converges and departs from each other. Gross domestic product, unemployment, inflation, and many other indicators reflect economic conditions.

Stock Market Turbulence During The Pandemic

The substantial rise in stocks has responded to our economy’s opening as lockdowns ease, and people return to work. That was not all to record-setting stock price movements as sudden as the S&P 500 index was its rally back to $3,193.93 on June 5th close. That is an astounding 42.8% climb through the latest close. The market is nearly back to the February 19th peak.

3 Fundamental Factors That Affect Stock Prices

When investing, you should have a basic knowledge of the economy and the Fed’s role in correcting economic changes. Those changes could indicate a weakening economy, direction of interest rates, or higher inflation.

1. The Economy

Many investors made changes to their portfolios. They sold specific stocks they anticipated would be most hurt by the lockdown, rotating into the newer winners. I made some of those changes to my portfolio. Additionally, as the market seemed riskier, I bought more dividend-bearing stocks of companies with solid balance sheets.

2. Industry-Related Matters

Investors look at specific expectations for growth in revenues, cash flow and earnings, balance sheet strength (e.g., liquidity and debt ratios), and corresponding valuation. To consider a company’s strength,  look at some of the personal financial ratios relevant for investing.

3. Company-Specific Aspects

We are in extraordinary times. The coronavirus caused a public health crisis and an economic crisis. Although the economy is far from recovery, there have been opportunities to make money in the financial markets.

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