Relationship Between Stock Market and Economy

This research project explores the relationship between the stock market and the economy. It discusses how the stock market reflects economic conditions and influences business investments. The stock market and the economy move in similar cyclical patterns.

Research Project Part 1: Comprehensive Outline
Name
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Outline for the relationship between the Stock Market and the Economy
A) INTRODUCTION:
i. Thesis statement, which includes the main points to be covered
There is a significant relationship between the stock market and the economy of a
nation, and the relationship exists through the role of the stock market in the financial
market and business investments.
B) BODY:
i. The stock market is a reflection of the economic conditions in the country as a whole.
As such, if the economy of a nation is growing, then the productivity and output will also
be increasing. In turn, this translates to higher profits made by the organizations, making
their shares more attractive to the general public (Li, 2019). Furthermore, a prolonged
period of economic growth will further benefit the share prices of an organization. In
contrast, if the stock market predicts a decrease in economic growth leading to
recession, then the process of the company’s shares will begin to fall gradually in
anticipation of lower profits, and hence lower dividends (Li, 2019). Mainly, one can
attribute this to the fact that recessions are associated with uncertainty and investors are
unwilling to buy shares which are highly volatile and riskier (Bowyer, 2013). In this
regard, therefore, there is a significant relationship between the economy of a country
and the stock market.

ii. The stock market also affects the degree of business investments in the economy.
Predominantly, this is because businesses prefer to make capital investments when
they believe that these investments would result in rising market values for the firms.
Additionally, mergers and acquisition operations tend to increase during bull markets
because corporations are able to use stock as currency (Amadeo, 2019). In turn, this
increases the level of economic activity in the country, thereby boosting the economy.
On the other hand, business investments in the bear markets is usually stifled with an
increase in the number of new publicly listed companies as they are less confident
about such conditions. Consequently, this leads to the reduction in the number of new
listings as well as merger activities. Eventually, this brings about a decline in the level of
economic activity.
iii. It is imperative to also note that the stock market and economic activity move is
similar cyclical patterns. Thus, although there are other factors that influence the level of
economic activity, the stock market is an imperative factor (Bosworth, 2008). For
instance, the great depression was largely as a result of a crash of the stock market.
Specifically, a stock market crash adversely affected the gross domestic product of
countries across the world as personal consumption and business investments declined
overtime (Bosworth, 2008). Additionally, the stock price index is a major component and
indicator of the performance of a nation’s economy.
C) CONCLUSION:
Indeed, there is a significant relationship between the stock market and the economy of
a country. It is a reflection of the economic conditions of the country and influences the

degree of business activity and level of investment within the economy. Furthermore,
the stock market and the economic cycles move in similar cyclical patterns. For this
reason, the relationship between the stock market and the economy cannot be
downplayed.
References
Amadeo, K. (2019). How the Stock Market Affects You, Even If You Don't Invest.
Retrieved from https://www.thebalance.com/how-do-stocks-and-stock-investing-
affect-the-u-s-economy-3306179
Bosworth, B. (2008). The Stock Market and the Economy. Retrieved from
https://www.brookings.edu/wp-content/uploads/1975/06/1975b_bpea_bosworth_
hymans_modigliani.pdf
Bowyer, J. (2019). The Economy Has Nothing To Do With The Stock Markets, Right?.
Retrieved from https://www.forbes.com/sites/jerrybowyer/2013/04/28/the-
economy-has-nothing-to-do-with-the-stock-markets-right/#2fa93f82140a
Li, Y. (2019). The stock market and the economy are telling two different stories.
Retrieved from https://www.cnbc.com/2019/03/05/the-stock-market-and-the-
economy-are-telling-two-different-stories.html