The fact that Stock Exchanges show strong variations in stock prices influences the level of economic activity? What are the positive and negative effects of these variations?
Dear Roberto - Minadeo,
In a situation where the amplitude of short-term strong changes in valuations of securities, including shares and bonds on securities markets, is increasing, the situation of extreme reappraisal of these valuations is more frequent and the risk of a spectacular, sharp discount, bear market and stock market crash increases. And such violent stock market crashes began with major financial and economic crises. The largest economic crises lasting a few years were the source of many negative macroeconomic processes, decline in host growth, consumption, investment, and an increase in unemployment. There were large social costs, productivity dropped, tax revenues to the state budget, the state of public finances deteriorated. Paradoxically, in the situation of increased financing needs for new development projects, which should restore optimal economic growth, in the situation of an economic crisis, the possibilities of financing new investment projects based on public funds were decreasing. The source of this type of economic crises is the lack of a full correlation between the valuation of assets on stock exchanges and the processes of productivity and consumer demand for manufactured economic goods. In addition, after analyzing the sources of the global financial crisis of 2008, the erroneously pursued monetary policy by the largest central banks, including in particular the Federal Reserve Bank, is added to the sources of this largest financial crisis in the history; moral gaming practiced by investment banking trading in securities used to finance mortgage loans for borrowers without creditworthiness; imperfect credit risk management systems for derivatives or unreliable practices, non-compliance with security procedures for credit risk analysis and control, and many other factors in investment banking.
Do you agree with me on the above matter?
Please reply
I invite you to the discussion
Best wishes
Well, the financial markets are supposed to be a mirror of economic activity. Sometimes, however, the tail does wag the dog.
Though what Prof. Dariusz said is very important, let's also not overstate the sway markets have over the real economy. Even today most of the large corporations do not depend on the markets to raise capital. Also, external financing via debt/equity securities is not the go-to choice for most large businesses in developed economies, never mind the emerging/frontier ones. Financial intermediaries continue to have a strong grip over this channeling of resources.
Yes, they do. The markets in a way indicate the sentiments of the investors.
Dear @Dariusz Prokopowicz. Firstly, Thank you for your attention and your responses. I would like to deal with your ideas in parts. The crisis of 2008 began with an unrealistic bubble in United States real estate financing. The same mortgage was resold several times in the financial markets. When unemployment increased and thousands of mortgages ceased to be paid, the domino effect was terrible. In this situation, I do not see the influence of the rise and fall of stock exchange quotes.
Hi, @Afraa Ibrahim. I liked your vision very much: it goes up and down the stock market as an indicator of economic activity.
Dear @Imtiaz Sifat.
It is interesting to put the capital market in its proper place in terms of business financing. I confess I was not paying attention to this point of view.
Dear @Dariusz Prokopowicz. I fully agree with your statement that strong market variations are brought about by economic-financial crises.
THE STOCK MARKET is not a precondition for economic growth nor for the existence of the economy, hence, there were economies throughout the world that grew and collapsed, but ultimately all grew.... without the stock market. Where there is stock market, it represents only a small segment of economic agents in that economy who come to a "market" to allocate their resources (money) in various assets. Can it be used as an indicator of the health of the economy? Perhaps yes, but with limited use. What percentage of the money or value in the economy is in the stock market, i.e. in a given economy, take the capitalization of that market divide by the country's GDP... how big is that? Compare that to your level of confidence interval, you can get the answer to the question of whether the stock market has significant influence on the economy, economic growth, etc. There is more to and in the economy than what we see in the stock market.
Great answer, dear @Paul Louangrath. Interesting to consider the stock market as only representing part of the economic agents
Dear Roberto Minadeo,
It depends whether the stock exchanges fulfill their role as securities markets, whether these markets operate objectively, efficiently, independently, reliably, etc. The issue of the reliability of the operation of securities markets is a high level of competition, no pressure groups on the part of investors and stock exchange players, effective market valuation securities, which is correlated with the economic and financial situation of issuers and the entire market presents a picture of the economy. In addition, an important issue is also the efficient and reliable functioning of financial supervision institutions that ensure that the stock exchange functions reliably and in accordance with the principles of an efficient market. A high level of amplitude fluctuations in the price of securities is a negative aspect and usually occurs in periods of increased investment risk, credit risk, etc., and in periods of financial and economic crises, in times of high level of investor uncertainty about the future economic and stock market situation.
Greetings,
Dariusz Prokopowicz
Hi, Dariusz Prokopowicz
Yes, competition and absence of inside information is truly important to this market.
Yes, if the stock market is related directly to the economy,. No, if the stock market does not directly impact the economy or has weak integration with the daily life of people like here in Iraq.