Skip navigation

 Login or Register | Member Centre

What does stock market say about the real economy?

MADELAINE DROHAN

Globe and Mail Update

Latest comment posted at 1:12 PM EDT 22/03/08

Linkage has been stretched to breaking point ...Read the full article

This conversation is closed

  1. pran manga from Canada writes: The connection between the stock market and the real economy is as the author says almost non existent if our time frame is very short. There can not be any real relationship on a day to day basis, nor weekly or even monthly. But there may be longer term.Indeed there has to be. After all, the stock market is a big part of the economy.
  2. Rudy Krueger from High River Alberta, Canada writes: It must be difficult to write anything about the current state of affairs because it has no precedent and analysts seldom use fundementals to look ahead - choosing rather to compare a current event to past ones. There are maybe two things to look at in a complex scenario - events and contexts. A match thrown on dry ground - maybe no result. A match thrown on a puddle of gasoline - a flare up. It is hard to divide events from contexts but we can to some degree. But here are some context differences for all that is happening. Global econmy is in a fully urbanized society so few people can hide on the farm and survive. Materialistic ambitions are enormous globally and a million megatonne motivation to get going again. Trillions of dollars of infrastructure requirements loom only months ahead for virtually all economies globally (roads, power generation, environmental clean-ups, health care facilities, post-war restoration, industrial facilities, water management, energy distribution). War has run its course - people are sick of it and will not tolerate another regime such as Bush et al..... communications of all kinds are reaching everyone instantly and democracy has become two-way through the internet. These do not even scratch the surface of the set of differences in context. There are huge demographic issues (aging boomers and skill shortages.... inclusive workforce and a general demise of exclusion in most societies and economies....) Viewed in the new context, few of the results of events that seem familiar can be predicted by looking back over one's shoulder. But we can look ahead. The coiled spring that I have described above - ambitious and energetic populations with a taste of poverty and a taste of success - do not want to go backward. Any regime that does not deliver - even the Chinese regime - can kiss their a__ goodbye. It won't be long before today's big problems fall behind.
  3. Nick T from Oakville, Canada writes: More than 2/3 of the trading in the market today is driven by algo's. The days of a human entering orders to the market are going away. It is difficult to compare todays market to one of 50 years ago.
  4. Don Quixote from the Banana Belt, On, Canada writes: Could one say the stockmarket is driven by the emotional dream of quick riches for a large part of the investors?
  5. Rocky Balboa from United States writes: The stock market is driven by fear and greed, as it always has been. Today's technology is much more advanced and automated than what existed in 1929, but the human emotions of the players have not changed. In 1980, my former employer could have been forced out of business because of the Hunt brothers silver speculation. Our firm was one of the Hunt's major brokers. I had nothing to do with the Hunt brothers, but I might have lost my job just the same if the Hunts had defaulted on their silver contracts and caused a large loss to the brokerage firm. Today, it is subprime mortgages; in 1980 it was silver speculation. Stocks were not directly involved in either case although they certainly reacted to movements in the other markets.
  6. The Retail Investor from Canada writes: The proof there is no correlation is by plotting stock returns against the following year's corporate earnings. The resulting scatter graph would show dots tightly on a diagonal rising line if there was correlation.

    The actual result is a random scatter. See the Excel graph (Sheet10) at:
    http://members.shaw.ca/RetailInvestor/StatsCan.xls
  7. J K GALBRAITH from Canada writes: It is great to have a Globe and Mail columnist challenge the accepted business orthodoxy! Yes, greed and fear has always been part of the market but fundamentals about the markets and a company use to drive the majority of the market while speculation was a smaller component. That has now switched and speculation drives the post- modern stock market. Think of how many times you have heard a business commentator say that the market has already priced an event (usually a change in interest rates) before the event actually happens.
  8. Gerry O'Brien from Canada writes: In response to The Retail Investor:

    I looked at the scatter chart in Sheet 10. I inserted three trend lines: one linear and two polynomial lines (the first with an order of "3" and the second with an order of "6") Interesting. There are overall positive trends but within limits. In essence the polynomial trend lines show (1) that there are positive trends between Earnings Growth within the limits of -40% to 35% and Index Growth Previous Year within the limits of -35% to 20%. Outside of these limits, the trends are negative -- understandably. (2) Interestingly, the intercept of these trend lines is when the Index Growth Previous Year is about 8% (on the y axis) and when Earnings Growth is zero (on the x axis). (3) I estimate that the slopes of these trends are less than " 1" meaning that for every 1% of change in Index Growth Previous Year (on the y axis), there is more than 1% (I estimate roughly about 2%) of change in Earnings Growth (on the x axis) within the stated limits.

    Retail Investor: what do you make of this?
  9. The Retail Investor from Canada writes: To O'Brian. I do not pretend to be a statistician. While it is probable that regression analysis would show a positive correlation, in my experience regression analysis finds correlations everwhere, regardless.

    From a 'real life' perspective the scatter is random. The only correlation observable to commoners like me is the correlation between negative stock returns with negative earnings growth. And even these has exceptions.

Comments are closed

Thanks for your interest in commenting on this article, however we are no longer accepting submissions. If you would like, you may send a letter to the editor.

Report an abusive comment to our editorial staff

close

Alert us about this comment

Please let us know if this reader’s comment breaks the editor's rules and is obscene, abusive, threatening, unlawful, harassing, defamatory, profane or racially offensive by selecting the appropriate option to describe the problem.

Do not use this to complain about comments that don’t break the rules, for example those comments that you disagree with or contain spelling errors or multiple postings.

Back to top