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Fall of markets

There is a close relationship between the economy and the stock market. The stock markets are the epitome of the growth in the economy.

business Updated: Sep 14, 2009 16:42 IST

There is a close relationship between the economy and the stock market. The stock markets are the epitome of the growth in the economy.

With the world economies coming under the impact of recession, investors were deeply affected and became worried. Why the economy tends to move in the same direction as the stock market?

One of the key reason behind this phenomenon is that large number of investors act on the inherent value principle. Each time, Investors constantly watch macroeconomic variables to be sure about when the next downturn in the economy will take place.

Investors predict the growth rate of the economy and often sell off their shares before the economy starts declining. This makes the impression that the stock market causes a recession. However, the fact is that the causality is the other way round.