Stock Markets Exposed

How does the stock market act as a forecast of future economic performance?

I have read articles from all over the internet disputing the relationship between the stock market and the economy, however I have yet found any good arguments supporting the link between the two. Please answer in detail.

Public Comments

1. leng lui, i want kao u can? if can, message me lo! hehe... kk to the question... first of all, u not study finance right? or stock or business equity! if u study one of them u will understand why! i only give u brief of what is what! nothing is forecast! everything happen for a reason! ok? the world economic now is crisis! but it will turn back to good when the time is come! the is what they told u in every newspaper and magazine! but u don't know when and how it will turn to good! because u not a professional to the economic! if u think u want take a advantage from it, i say to u, just don't! u will mess up all ur money throw to the sea that u don't know! economic is all about money! stock is about how the money flow from one to another! big player in the market now pull all their money from the stock market to make it crash so they can control the whole world stock! this is what u don't understand! they will earn a lot from that mean (A LOT)! they make the bank bankrupt! do u know where all the money go after they bankrupt? rich people hand! so is a recycle of earning money from the stock market big time! this is the first reason! for more... please read more magazine and newspaper! don't forecast the future, it is control by big player! they make things happen when they want it happen! try to follow only! don't hear what people said!
2. The stockmarket is probably not a very reliable in forecasting future economic performance. In theory though, the stockmarket should reflect the future economic conditions to some extent, since the prices of stocks should reflect expected future performance, which depends heavily on economic conditions in the future. In reality, though, the stockmarket mainly seem to reflect conditions at the present.
3. 1) The stock market tends to "discount" the future. 2) The stock market was moving lower in 2007 BEFORE last year's meltdown. 3) A similar thing happened in 2000 and 2001 BEFORE 2002's "collapse" occurred. 4) It remains to be seen if the stock market will stabilize and then rally before people become more confident about the future. We'll see.
4. I'm going to simplify my response a little because a full one would take the space of a book :-) The stock market tends to "discount" the present. This is based on the EMH = Efficient Market Hypothesis which says that all available market information is already reflected in the stock prices because of the sophistication of the market and speed of information propagation. Market participants (funds, investors etc.) then use forecasting models to try and determine how the business/economy/other market participants will affect future prices. It therefore uses things like companies earnings forecasts, macro economic conditions, interest rate changes etc. Because of this future factors being taken into account the market is considered 'forward looking'. Hope this gives you some initial understanding and enough terminology basis to research further if you're interested.