A study on the relationship between stock market development and economic growth in the US 

Relationship Between Stock Market Development and Economic Growth in US

A stock exchange is responsible for effective operations of the economy. It acts as the support to a nation’s economic infrastructure. Stock exchanges assist companies raise money to grow. They provide individuals the facility to invest skilfully in companies. If investors are self-assured, they will buy stocks, mutual funds, or stock options. Stock exchanges ensure and enforce regulations for the trading of stocks.

Stock exchanges and all of the companies that are related with the stock exchanges provide employment. It is widely believed that stock markets predict what the savviest investors think the economy will be doing in about six months.

The stock market is an excellent predictive economic growth indicator for the U.S. economy and they contribute to the nation’s economy. US stock markets make it easier to take a company public than in other countries. It makes material on companies including facts and figures easy to obtain. This increases the trust and confidence of investors from around the world. As a result, the U.S. stock market attracts the most investors. It’s a smart place for U.S. companies to consider when they are set for development and grow business.

The economy affects the Stock Market

1. Stock prices usually rise in the expansion phase of the business cycle. There are three main indices in the US, they are the Dow Jones Averages, the S&P 500, and the NASDAQ.  Since the stock market is an indicator of confidence, a crash can distress economic growth. Lower stock prices would indicate less wealth for businesses, pension funds, and the decrease in the fortune of individual investors. Companies can’t get as much funding for expansion. When retirement fund values go down, it leads to reduced consumer spending.

2. If stock prices stay depressed long enough, new businesses can’t get funds to grow. Companies that had invested their cash in stocks won’t have enough to pay employees, or fund pension plans. Older workers will not have sufficient money to retire with.

3.A stock market crash indicates a sudden and severe loss of confidence. An economic crisis typically causes it. The glaring example of which is when Dow lost 700 points in the market crash of 2008. The investors were terrified and panicked when the Senate failed to help and support the bank bailout bill. The same loss of confidence also led to the Great Recession. In such a state of panic, a stock market crash can cause a recession.

Stocks affect the economy

1. They allow individual investors to own part of a successful company. Only a few private equity investors could profit from America’s free market economy without any stocks. Investing in the stock market is the best approach to worn out inflation over a period of time. Stock prices almost increase 10 percent annually on average which is adequate to compensate most investors for the additional risk that they take.

2. Stocks provide the capital for companies to grow large enough to gain competitive advantage through economies of scale. Business owners use personal credit cards, bank loans and even float their own bonds sooner or later. It only helps a company marginally.

At the outset to sell stocks, they take the company public over an Initial Public Offering (IPO). An IPOs is a mode raises cash in an organized method. It also indicates that the company is prosperous enough to fund the IPO process. The only downside is that the founders give away their rights to own the company. It is transferred to the stockholders. However, they can still hold a controlling interest in the company if they retain at least 51 percent of the shares.

3. Stocks assess how valuable investors think the company is. When stock prices rise, it indicates that the investors believe earnings will increase. Falling stock prices would mean that the investors have lost confidence in the company’s ability to increase its profit margins.  A rise in stock prices indicates they are more confident in the future growth of the Company. A fall in the stock market translates that the investors are running toward other traditional ways of investments.

US economic growth

Freer economies tend to be more prosperous when assessing economic growth. Here the measurements differ somewhat. Recently, for the United States economic development in 2018, the Heritage/Wall Street Journal Economic Freedom Index revealed a level of economic freedom comparable to 1998. Economic freedom was rising upward until 2008 and then started falling down till the beginning of 2019.

The index next year will possibly reveal major progress in terms of taxes and regulations but descent in government expenditure and trade. The Fraser Institute index which is formulated with a two-year interval i.e. the 2018 index reflects the 2016 scores,  shows the United States is already improving under the last years of Obama and a Republican Congress.

The world scene is not very positive for US relationships. China’s growth is expected to slow down to just above 6 percent, Europe’s and Canada’s to below 2 percent. Even Latin American economies are predicted to grow at less than 2 percent. However, one of the best performers will be Chile, but it is a very small market, not reaching 1 percent of total U.S. exports.

A major development is a new government of Jair Bolsonaro in Brazil, which might help in liberating the economic potential of the largest South American economy whose GDP is equal to that of countries like Mexico, Argentina and Chile combined. However, the consequences of rising affluence in Brazil would take time to have any major impact on U.S. economic growth.

Factors like diminishing consumer confidence, uncertainties about the future of the U.S. political and economic scene, and low rates of growth in the economies of trading relationships will make it almost difficult to continue the current positive upward trend in U.S. GDP growth.

The US and other developed economies will not be able to depend only on foreign trading relationships for faster growth. A slowdown of the economy in 2019 is expected, but nothing drastic – perhaps just above 2 percent real GDP growth, which is still higher than the average of the Obama years.

The sharp decline and volatility of the U.S. stock market at the end of 2018 aren’t echoed by related negative movements in the real economy.  Still, the existent economy will have to alter to a state of higher interest rates, reduced economic development among the related U.S. trading partners and anxious uncertainty about the future of U.S. economic policy.

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