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The Economy and the Stock Market, Investments and Wealth Management

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[The Trading Floor of New York Stock Exchange (NYSE) - Wall Street Journal]



The Stock Market Is Not The Economy.


- Overview

The economy is complex and growing rapidly. News reports and headlines don't always tell the whole story. Often, this simply means that market volatility may have little practical impact on what we believe to be the underlying reality of the economy. Or there are a number of important structural factors that make the market outlook different from the average citizen's perception of the country's overall economic health. 

Despite the fact that about half of households own some stock, the wealthiest Americans hold the lion's share of the stock market. This means that the stock market and stock prices can be disproportionately affected by a small portion of the population, and disproportionately affected by the wealth and alternative investment choices of that small portion. If the market is disproportionately affected by that smaller subset, then by definition, the influence of the bigger stuff will also be disproportionately reduced.


- Wall Street vs Main Street

Main Street vs Wall Street is used to describe the average consumer, investor or small local business versus a large investment firm. Main Street represents small and local, including small businesses, general individual investors and small independent investment firms. Wall Street as a symbol of advanced finance refers to large investment firms, high net worth investors and global corporations.

Main Street describes the average American investor, small independent businesses and investment institutions, or the real economy. Wall Street represents high net worth investors, large multinational corporations or capital market high finance. Wall Street firms and ordinary investors can cooperate for mutual benefit, but there is still conflict between them.

There are many contradictions between the two sides, but at the same time they are also highly interdependent. The performance of the real economy (Main Street) and capital markets (Wall Street) is highly correlated most of the time, but sometimes disjointed.


- The Stock Market and The Economy

"Stock Market" means the collection of markets (such as the S&P 500, Nasdaq, or Dow) in which the regular activities of buying, selling and issuing shares of public companies take place. On the other hand, "economy" is a country's wealth and resources in terms of production and consumption of goods and services and money supply. 

Although the two terms are often used interchangeably, they are not the same thing. However, they do affect each other. For example, a strong economy can raise concerns that inflation is rising. Concerns about inflation have investors worried that the Federal Reserve may raise interest rates faster than expected. Worries about the Fed fuel a long-held view that rising interest rates kill bull markets, in part because business growth tends to slow when borrowing costs become higher. All these worries and anxieties lead to one simple conclusion: sell.

 

- The Stock Market Is Not The Economy

The stock market and the economy are not synonymous. You can see that workers' wages are actually stagnant or only increasing slightly compared to the growth we see in the stock market. All of this means that there may be financial gains that the average worker cannot. So the stock market is not the economy. But the stock market is adjacent to the economy.

The stock market constantly observes the real economy. And make predictions based on what they see in the real economy. Investors and traders may be looking at trade policy, unemployment, housing data, or any of the many factors that make up the economy, and using what they see to try to predict the future value of certain stocks. What is happening in the real economy is contagious. Once it reaches financial markets, it feeds back into the economy.

But for most people, it's probably not a good idea to follow every turn in the major indexes. The stock market is moody. We often call it "Mr." market. ’ Sometimes he was optimistic about the future, sometimes he was negative about the future. Sometimes there is reason to feel one way or the other, and sometimes it just goes with the flow. So, again, the stock market is not the economy. But they are related. 

 

- Economic Indicators

Economists typically group macroeconomic statistics under one of three headings - leading, lagging, or coincident. Figuratively speaking, one views them through the windshield, the rear-view mirror, or the side window. Coincident and lagging indicators provide investors with some confirmation of where the market is and where it has been, and are a good place to start because they help indicate where the economy might be heading. 

How do we use economic indicators to help us try to anticipate the direction of the stock market? While we certainly do not have a crystal ball, we look at a variety of measurements such as GDP, employment rates, and jobless numbers as clues to where the economy is going. The consumer price index, producer price index, and retail sales are also seen as indicators of the health of the economy, by telling us how the consumer is feeling about the economy. 

Additionally, understanding the government’s use of Fiscal Policy and the Federal Reserve’s Monetary Policy is another way in which we can predict the stock market’s reaction to change. Fiscal Policy, implemented by the president and congress, is used to either pump money into a failing economy through government expenditure or take money out of the economy by raising taxes. Monetary Policy is the Federal Reserves raising or lowering interest rates for banks, which trickles down to affect what price businesses can borrow money to continue growing. 

In the end, the stock market and the economy are not the same.  However, they heavily influence each other. This relationship is something we will continue to track as we monitor the investing landscape.

 

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[London, Uk - Civil Engineering Discoveries]

- Market Indexes

In order for an economic indicator to have predictive value for investors, it must be current, it must be forward-looking, and it must discount current values according to future expectations. Meaningful statistics about the direction of the economy start with the major market indexes and the information they provide about:

  • Stock and stock futures markets
  • Bond and mortgage interest rates, and the yield curve
  • Foreign exchange rates
  • Commodity prices, especially gold, grains, oil, and metals

Although these measures are crucial to investors, they are not generally regarded as economic indicators per se. This is because they do not look very far into the future - a few weeks or months at most. Charting the history of indexes over time puts them in context and gives them meaning. For instance, it is not terribly useful to know that it costs $2 to purchase one British pound, but it may be useful to know that the pound is trading at a five-year high against the dollar.

 

- Investment Management

Investment management refers to the handling of financial assets and other investments - not only buying and selling them. 

Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well. 

The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.

 

- Weath Management

Wealth management is an investment advisory service combined with other financial services to meet the needs of wealthy clients. This is a consultative process in which the advisor gathers information about the client's needs and customizes a bespoke strategy with appropriate financial products and services. A wealth management consultant or wealth manager is a type of financial advisor who uses available financial disciplines such as financial and investment advice, legal or estate planning, accounting and tax services, and retirement planning to manage the wealth of affluent clients with a set of fees. 

Investment management tends to focus only on investing assets; wealth management takes a broader approach. The former may be handled by a broker or advisor who only focuses on managing your portfolio. However, if you hire a wealth manager, he or she will usually go beyond assets and incorporate taxes, insurance, and the entire estate into the planning process.

 


[More to come ...]



 

 

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