The relationship between the stock market and the economy is interwoven; if the stock market is performing well, it is due to a growing economy. The Gross Domestic Product (GDP) measures the economic growth and the value of the GDP depends on the success of established businesses, which means the stock market works effectively as an economic indicator for the economy.
How the Stock Market Affects GDP
The stock market can have both positive and negative effects on the GDP. The GDP is calculated based on the money spent by consumers, businesses, and the government over some time. The stock market price, on the other hand, is driven by supply and demand.
There is also the Bull and Bear market where the bull indicates growth in equity markets and the bear indicates a decline.
In a bull market, the company is doing well and will invest its funds back into the economy via launching new products, hiring new workers, etc., which will increase the GDP. In the bear market, investors tend to sell their stocks out of fear of losing their investments. This could influence how consumers spend generally, especially if the decline in the market is quite evident, thereby hurting the GDP.
The Stock Market Against Job Losses
Considering all the factors that define the impact of the stock market on the economy, it will be safe to say that a high unemployment rate would reduce consumer spending, which can result in a bear market.
However, recent reports found otherwise, especially in 2020 with the COVID pandemic. In the first few months of the pandemic, the US economy shed a record 22.2 million jobs and as of December 2020, a CNBC report shows that the U.S. has 10 million fewer jobs now than before the pandemic.
Despite the high unemployment rate during this period, the stock market was at an all-time high, which seems paradoxical. There have been several theories to justify this, one of which is this report that shows how the stock market is a leading indicator of the economy while the unemployment rate is a lagging indicator.
Also, since the Bureau of Labor Statistics reported a large percentage of the job losses to be temporary, many people believed they would have their jobs back eventually, so there was no reason to panic.
One contributing factor is also the easy access to trade stocks today. Anyone can have access to the best stock trading app for beginners right from the comfort of their homes. The extended lockdown periods and the lack of jobs for some encouraged more people to learn new things and look for an alternative source of income, of which the stock market is one.
The stock market is not the economy, so while they are both interwoven, they might not always yield the result you expect. But regardless of what happens, market history has shown that the stock market and the labor market would recover and everything would balance out eventually.