The stock market acts as a highly relevant market sentiment indicator and can impact the GDP (gross domestic product) of a country very strongly. GDP is the measure of the output of all services and goods in an economy. With a change in the stock market prices, the economic sentiment also changes and it ultimately drives the effect on GDP which can be either positive or negative.
Impact of Stock Market on GDP and Economy
If the stock market is rising (known as a bull run), it provides much optimism in the economy and the stock prospects. Companies can issue new shares of their stock in order to generate more capital that can be used to invest in new projects, generate more employment, and expand operations. This inevitably boosts the GDP and also creates more wealth for both the investors and consumers. This confidence allows for increased spending and major consumer purchases such as automobiles and homes. All these activities in conjunction make way for a high economic growth.
Alternatively, in a falling stock market (also known as a bear market), investors tend to sell stocks to avoid losses on their invested money. These losses cause a pullback in consumer spending which reduces the revenue and sales for companies and businesses. It can also lead to higher unemployment with an uncertain future. In such a scenario, it becomes difficult for businesses to obtain financing and can also lead to a mismanagement of existing debt. All these factors inevitably lead to reduced business and consumer confidence. This has a negative impact on the GDP which causes the economy to shrink.
GDP – Special Consideration
The effect of Gross domestic product GDP on the stock market is discussed more often than the impact of the stock market on the GDP. With an increase in the GDP, there is an increase in corporate earning which makes the stocks move towards a bull run. Conversely, if the GDP is falling, it will lead to less consumer and business spending, thereby driving the markets lower.
However, whether it’s a bear market or a bull market, the stock market will have a decent amount of indirect Stock market impact on the GDP, and the economy overall.
Stock market is a true indicator of sentiment that impacts the the GDP in an economy. If the stock market is rising, it points towards a good performance by the companies with positive prospects for future growth. This leads to the generation of employment, better investment opportunities, and higher consumer spending as more people get employment. This process will strengthen the cycle and lead to an increase in the GDP. If the stock market performs poorly, it will have an effect opposite to the one described above.