Stock market still a good indicator of how the economy is faring, says expert
3 Mar
2009, 1327 Hrs
Washington, March 3 An American business expert at the University of Illinois thinks that it is not correct to put stock in suggestions that financial markets are a faulty barometer of the nation's economic climate.
Professor David Ikenberry admits that day-to-day ups and downs can be misleading, but insists that broader stock market trends are a good indicator of how the economy is faring and whether it's on the rise or sputtering.
"Markets are made up of a lot of people with a strong motivation to discern the truth because it's in their own best interests financially. To ignore that dynamic, you're turning your back on a valuable tool in terms of gauging economic health," he said.
His suggestion comes at a time when many people are questioning whether markets accurately reflect the economy, considering the fact that stock indexes have continued to slide despite massive government initiatives to stem the deepest economic downturn since the Great Depression.
Ikenberry says that it may not be possible to gain correct idea as to economic conditions looking at day-to-day swings, but, over time, trends typically mirror the state of the economy, including a nearly 50 percent market plunge during the current meltdown.
"While investors may not be able to get it right all of the time, they do get it right on average," said Ikenberry, whose market research includes long-horizon stock returns.
According to him, a close look at recent market activity suggests that the economy may indeed be responding to an unprecedented wave of bailouts, stimulus plans and other government efforts to reverse the slide.
The expert further adds that most of the market's recent tumble came last fall, and declines have ebbed in the wake of government moves to shore up credit, housing markets and industries like auto making, which were on the verge of bankruptcy.
Ikenberry says that trading, which was once furious, is also stabilizing.
"After big, precipitous declines in October and November, it really looks like the market is going sideways now. That reinforces that the market is taking everything into account and trying to look forward," he said.
He further states that restoring the flow of credit is a key to recovery, and markets are showing early signs that government efforts to mend the banking system are working.
"There's still a lot of negative news on the horizon and there are still going to be negative contractions. Things will continue to get worse before they get better and we're a long way from saying we've turned the corner, but there are weak signals that the economy is starting to stabilize a little bit," Ikenberry said. (ANI)
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