Sep
Do Changes in Stock Prices Cause Recession?
The stock market and economy of the country are interrelated. People think that if the stock market is showing a downtrend, then the economy also shows a downtrend. But there is no strong evidence to prove this. Rather the stock market show what investors believe is the state of a country’s economy. So realize that the index of the stock market is just a price which fluctuates according to the demand and supply theory.
The basic rule in economics states that if the supply increases, the price automatically decreases. For instance, if the manufacturing of the automobiles has increased, then the prices of automobiles are sure to decrease. When we apply the same theory to the stock market, as the company increases its stocks, the price of the stock should decline. And, if the stock prices decline, then the economy should fall. But this is not seen in the economy and added to this the new stocks are issued when the economy is growing.
This is mainly because when a company makes money from the stock market, it uses that money to grow its business. Hence, the economy grows.