Investing basics: Explaining the disconnect between the stock market and the economy

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<p><span>You may have heard politicians and pundits talk about the economy and the stock market as if they were interchangeable.</span><br /><br /><span>But here&rsquo;s the thing - the stock market is <em>not </em>the economy.</span><br /><br /><span>The economy can be defined as the production and consumption of goods and services.</span><br /><br /><span>Employment rates and GDP, the gross domestic product, are measures of economic health.</span><br /><br /><span>GDP is the monetary value of all finished goods and services made within a country during a certain period, and it&rsquo;s used to estimate the size of the economy.</span><br /><br /><span>GDP growth year over year indicates a healthy economy, while slowing growth or an outright decline can be cause for concern.</span><br /><br /><span>The stock market is a collection of exchanges in which investors can buy and sell shares of companies and other securities.</span><br /><br /><span>It&rsquo;s easy to think that the stock market and the economy would go hand in hand.</span><br /><br /><span>Here&rsquo;s why they don&rsquo;t:</span><br /><br /></p> <ol> <li><span>The stock market doesn&rsquo;t represent everyone participating in the economy.</span></li> <li><span>It&rsquo;s disproportionately made up of large corporations, while small businesses are a major driver of the US economy.</span></li> <li><span>Kust over half the US population owns stocks, and a significant amount is owned by the wealthiest individuals.</span></li> <li><span>Lastly, stock prices on Wall Street reflect investor confidence in the&nbsp;</span><em>future</em><span>. Things like spending and employment on Main Street are indicators of the&nbsp;</span><em>current&nbsp;</em><span>economic climate.</span></li> </ol> <p><span>The stock market might reflect changes in the economy and vice versa, but the state of one doesn&rsquo;t necessarily paint the full picture of the other.</span></p> <p><span><strong>MORE ON THIS TOPIC:</strong>&nbsp;<a href="cmsgo+article:/#202133">The stock market is not the economy</a></span></p>

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