Stocks Vs. Economic Growth – What Relationship?

Contradict

QUESTION: Did you contradict yourself when you said a higher dollar will weaken the US economy?. Then you said interest rates will make stocks rise?

ANSWER: No, what you have to grasp here is that the stock market can rise for two entirely different reasons and it depends upon the mix of trends.

1) The normal market rally unfolds with higher corporate earnings and economic expansion.

2) When capital fears government whether domestic or international, then capital will park in stocks as a hedge, irrespective of corporate earnings. You can actually have GDP growth decline and the stock market will still rise. The DAX in Germany has risen even with corporate earnings not expanding and economic growth has been in decline as people try to hedge the collapse of the Euro.

The rise in the stock market with a declining economy unfolds exactly as does hyperinflation where assets rise against a depreciating currency value. This is not simply a one-dimensional relationship. It can become complex, and this is why people lose money when they try to reduce any trend to a one-dimensional cause and effect which does not exist.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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