Stock market and economic performance are aligned. Thus, when the stock market is performing well, it is usually a function of a growing economy. Economic growth can be measured in several ways, but one of the most prominent is by following gross domestic product (GDP).
When GDP is growing, individual businesses are producing more and usually expanding. Expanding business activity usually increases valuations and leads to stock market gains.
In this report, two major impacts are highlighted; consumer spending and business operations.
Stock Market and Consumer Spending
- Consumers often spend more during bull markets because they are making more from the effects of a strong economy and also feel wealthier when they see their portfolios rise in value.
- On the other hand, the economy is usually not doing as well and spending recedes during bear markets. A simultaneous fall in stock values also creates fear for the loss of wealth and purchasing power as the value of investments contracts.
A rising stock market is usually aligned with a growing economy and leads to greater investor confidence.
- When stocks rise, people invested in the equity markets gain wealth. This increased wealth often leads to increased consumer spending, as consumers buy more goods and services when they're confident they are in a financial position to do so.
- When consumers buy more, businesses that sell those goods and services choose to produce more and sell more, reaping the benefit in the form of increased revenues.
- Meanwhile, stock market losses erode wealth in both personal and retirement portfolios. A consumer who sees his portfolio drop in value is likely to spend less. This reduction in spending negatively affects businesses--particularly ones that sell non-necessity goods and services, such as luxury cars and entertainment, that customers can live without when money is tight.
Stock Market and Business Operations
- The stock market's movements can impact companies in a variety of ways. The rise and fall of share price values affects a company’s market capitalization and therefore its market value.
- The higher shares are priced, the more a company is worth in market value and vice versa. The market value of a company can be important when considering mergers and/or acquisitions that involve shares as part of the deal.
- Share issuance decisions can also be affected by stock performance. If a stock is doing well, a company might be more inclined to issue more shares because to raise capital.
- Lastly, positive increases in stock values can also potentially generate new interests for a particular company or sector. This can possibly add to revenue growth from sales or attract investors.
Source: Investopedia
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