A:

The stock market affects gross domestic product (GDP) primarily by influencing financial conditions and consumer confidence. When stocks are in a bull market, there tends to be a great deal of optimism surrounding the economy and the prospects of various stocks. High valuations allow companies to borrow more money at cheaper rates, allowing them to expand operations, invest in new projects, and hire more workers. All of these activities boost GDP.

In this environment, consumers are more likely to spend money and make major purchases, such as houses or automobiles. With stock prices in bull mode, they have more wealth and optimism about future prospects. This confidence spills over into increased spending, which leads to increased sales and earnings for corporations, further boosting GDP.

The Negative Effect of Low Stock Prices on GDP

When stock prices are low, it negatively affects GDP through the same channels. Companies are forced to cut costs and workers. Businesses find it difficult to find new sources of financing, and existing debt becomes more onerous. Due to these factors and the pessimistic climate, investing in new projects is unlikely. These have a negative effect on GDP.

Consumer spending drops when stock prices decrease. This is due to increased rates of unemployment and greater unease about the future. Stockholders lose wealth with stocks in a bear market, denting consumer confidence. This also negatively affects GDP.

The stock market's effect on GDP is less discussed than the effect of GDP on the stock market because it isn't as clear. When GDP rises above consensus or expectations of GDP rise, corporate earnings increase, which makes it bullish for stocks. The inverse happens when GDP falls lower than consensus or expectations of GDP decline. (For related reading, see: Economic Indicators That Affect the U.S. Stock Market.)

RELATED FAQS
  1. What is GDP and Why Is It So Important To Investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. What does ... Read Answer >>
  2. How does the United States government measure economic growth?

    Find out how the Bureau of Labor Statistics and the Bureau of Economic Analysis measure economic growth in the United States ... Read Answer >>
  3. What is the correlation between money supply and GDP?

    Read about the two-way correlation between the total amount of money circulating in the economy and gross domestic product, ... Read Answer >>
  4. What impact does the balance of trade have on GDP calculations?

    Read about the impact of the balance of trade on a nation's gross domestic product, and why the figures involved in each ... Read Answer >>
  5. Are Social Security payments included in the US GDP calculation?

    Understand how gross domestic product is calculated and whether or not transfer payments such as Social Security are included ... Read Answer >>
  6. How did World War II impact European GDP?

    Understand the effect of World War II on the European gross domestic product and what foreign and domestic factors influenced ... Read Answer >>
Related Articles
  1. Insights

    How to Calculate the GDP of a Country

    The GDP of a country can be calculated using two different approaches. GDP or gross domestic product of a country provides a measure of the monetary value of the goods and services that country produces ...
  2. Insights

    Why GDP Is Not an Accurate Measure of the Economy

    Is gross domestic product (GDP) an accurate measure of the strength or weakness of the U.S. economy?
  3. Insights

    Healthiest And Safest European Economies

    Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
  4. Insights

    U.S. GDP Better than Expected in Fourth Quarter

    U.S. GDP growth for the fourth quarter came in at a 1.0% seasonally adjusted annual rate, according to the Commerce Department's second estimate, issued Friday morning.
  5. Insights

    Deadly Flaws in Major Market Indicators

    These indicators give investors and experts some data to work with, but they're far from perfect.
  6. Insights

    Does High GDP Mean Economic Prosperity?

    Find out how GDP is the typical indicator used to measure a country's economic health, what it fails to reveal, and how GPI can help.
  7. Taxes

    Countries With The Highest Taxes

    If you thought your taxes as an American were high, think again. Here's a list of the top five countries with the highest tax revenues as a percentage of GDP.
  8. Insights

    China's GDP Examined: A Service-Sector Surge

    China's economy has surged over the last several decades but still has a ways to go to modernize. Here's a look.
  9. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
RELATED TERMS
  1. Real Gross Domestic Product (GDP)

    Real gross domestic product is an inflation-adjusted measure ...
  2. GDP Price Deflator

    The GDP price deflator is a system that converts output measured ...
  3. Nominal Gross Domestic Product

    Nominal gross domestic product measures the value of all finished ...
  4. Inflationary Gap

    An inflationary gap is a macroeconomic condition describing the ...
  5. Per Capita GDP

    Per capita GDP is the measure of a country's output that shows ...
  6. GDP Gap

    GDP gap is the forfeited output of a country's economy resulting ...
Trading Center