Stock Market and the economy are very much in talk these days. And it is well said that the performance of an economy’s stock market is considered as one of the best indicators of how well the economy is doing.
On Friday, 27 November 2020, the Bombay Stock Exchange’s Sensex closed at 44,149.72 and the National Stock Exchange’s Nifty closed at 12,969 whereas on 24 March 2020, a day before lockdown in India, the Sensex was closed at 26,674.03 and the Nifty was closed at 7,801.05 indicates that Indian stock markets have hit all-time high despite the COVID-19 lockdown and slowing economy and have made a remarkable comeback. What brings confusion in the minds of investors is the inconsistency between the markets and the economic condition.
Stock market might have positive or negative impact on the economy as a whole as the rise or decline in the stock prices can influence number of factors that might affect the economy especially investors’ confidence. In the same way, different economic conditions might also affect stock market. In case of bullish market, the overall confidence of investors in an economy increases and thus more investors enter the market leading to increased investment and increased spending on the goods and services which ultimately will affect the economic growth of an economy as consumer spending is also a part of GDP and thus, economic development in the country can be witnessed. This provides higher liquidity and higher returns in a shorter period of time to the investors. One of the greatest benefit investors enjoy is increased stock prices. Moreover, companies are also likely to make more capital investment and issue IPOs due to increased market value which will expand their business operations and create employment opportunities in the country and thus resulting in greater economic growth and prosperity.
The stock market at all–time high is both economy high as well as investors as it is good for both. However, stock market is only one of the factors that affects the economy, there are various other factors like interest rates, inflation, currency fluctuations, and monetary policy etc.