The pandemic made it very clear that the stock market has nothing to do with the real economy. People understood that a nearly 60% gain in the US stock market does not necessarily guarantee an equivalent economic growth. The worldwide economy showed a downward trend for the April and June quarter respectively.
The inverse relation between the stock market and economy
The economy provides a real picture of the country while the equity markets highlight the investments only. Economic growth is measured by GDP growth, which has been low across countries. Contrary to this, investment in the stock market increased manifolds. This trend might anticipate optimism related to the imminent covid 19 vaccines. Consequently, this has widened the scope of using the vaccines and opts for other treatments as well.
However, the fact remains that, to get the picture of the ground-level reality, we need to measure economic growth. Any recent economic survey suggests the lack of employment, the problem of unemployment and production etc. This indicates how economic growth is more about the overall growth and is long term. When there is stagnation in the growth, investors look for the stock market as an option.
The rise in stock market prices indicates an unstable economic condition. The stock market remains the easiest alternative for interested ones.
The more the investors, the more is the hike in the market prices. Why do people invest more?
- It ensures compounding – what you need is the assurance of a steady return of the money you have invested. The stock market is known for that. Even with lesser money, you are allowed to make more money. It is easily viable for anyone because charting tools and recommendation services are available.
- To bring in lots of money – there is a minimum of 10% growth in your money. Sticks usually have an upward curve and are better for long term investments. So investors are attracted to investing more of their money. It is quite easy for a smart investor to crack a long term deal which would ensure maximum profit. If you get more information about free stock trading app
- Stagnation in Bank Interest Rates- the pandemic has compelled the banks to lower their interest rates. The new lows and stagnation of money is a big turn off for anyone. People are mostly scared to keep the money as savings in the bank. There are high chances of devaluation which signifies loss of the hard-earned money. Investing in the stock market keeps the cash flowing.
- Ensures a tax-free investment – due to the pandemic, the governments of the countries have imposed more taxes. This has negatively affected the economy. In such a condition, people would happily invest in areas which would save them from heavy taxation. There are shares of companies which ensure a tax rebate. This has attracted many people.
- Making it easier to survive inflation – the stock market often acts as a saviour from the long-term inflation. The latter is the worst impact of the pandemic. Nowadays, you will see that the return rate in the stock market is more than or at least equivalent to the inflation rate. Either way, you are not losing money. So, this encourages people to invest more in the stock market.
The rise in stock market prices has few other justifications as well. They are as follows:
- Increase in Private Bond Market and Privatization –
The central banks are supporting the private bond market. Though this is yet to happen in India, in the USA, the Federal Reserve has already intervened. It is encouraging people to buy shares of private companies. The Federal has itself invested in those to promote a quasi-fiscal policy. The central bank is supposed to act as an agent protecting the Treasury in an emergency.
This has helped to narrow down the interest rates of government debts spread over the market. This makes a way to increase the supply of corporate debts ensuring the lesser number of corporate bankruptcies. However, all these are leading to rising in stock market prices.
- The upward rising curve for long term assets –
The interest rates have been pushed remarkably downwards. The markets are convinced that there would be no change shortly and hence they have done the required changes. They have hiked the rates of houses, gold, property and other assets. So, people are left with no other option than investing in shares.
- The stock market is not all-inclusive
The stock market is comprised of several firms but they need not make the whole economy as such. An economy consists of big, small and extra small firms. The stock market does not take into account the small and extra small ones. These do not probably have shares or dividends to indulge in the stock market.
The stock market is concerned with the ones which can attract investors. And shares of such companies have buyers as well. So, these are contributing to the upward trend of the stock market prices.
- Some of the firms in the stock market have gained remarkably due to the Pandemic –
Stocks or shares of companies like Google, Amazon Prime, Netflix, Microsoft, etc. are in high demand. The pandemic actually helped them. As during this period, people got more invested in such platforms. The digital platforms of entertainment gained subscribers and hence had a hike in demand. This might have allowed them to increase the price of their stocks and shares.
This is the tech-savvy generation. So it is obvious that people use the internet for every little thing. And who is stands most benefitted? Of course, Google! The company has always shown a steady rise in the prices of its share. And during the pandemic, the rising demand helped in increasing the prices of its share.
All these have attracted people from across the world to invest more in the stock market. The increased prices of shares might have led to inflation. But it has helped to maintain liquidity of cash in the market. Innumerable advantages encourage investors to invest more in the stock market. As an investor, you would also like to taste the fruits of success.