You may have heard politicians and pundits talk about the economy and the stock market as if they were interchangeable.
But here’s the thing--the stock market is not the economy.
The economy can be defined as the production and consumption of goods and services.
Employment rates and GDP, the gross domestic product, are measures of economic health.
GDP is the monetary value of all finished goods and services made within a country during a certain period, and it’s used to estimate the size of the economy.
GDP growth year over year indicates a healthy economy, while slowing growth or an outright decline can be cause for concern.
The stock market is a collection of exchanges in which investors can buy and sell shares of companies and other securities.
It’s easy to think that the stock market and the economy would go hand in hand.
Here’s why they don’t:
1) The stock market doesn’t represent everyone participating in the economy.
2) It’s disproportionately made up of large corporations, while small businesses are a major driver of the U.S. economy.
3) Just over half the U.S. population owns stocks, and a significant amount is owned by the wealthiest individuals.
4) Lastly, stock prices on Wall Street reflect investor confidence in the
. Things like spending and employment on Main Street are indicators of the
The stock market might reflect changes in the economy and vice versa, but the state of one doesn’t necessarily paint the full picture of the other.