While day-to-day ups and downs can be misleading, finance professor David Ikenberry says 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,” he said. “To ignore that dynamic, you’re turning your back on a valuable tool in terms of gauging economic health.”
Questions about whether markets accurately reflect the economy have surfaced as stock indexes continue to slide despite massive government initiatives to stem the deepest economic downturn since the Great Depression.
Ikenberry concedes that one-day swings are sometimes deceptive, rooted in overreactions to news reports or other market nuances. Over time, though, trends typically mirror the state of the economy, he said, 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.
He says a close look at recent market activity shows that the economy may indeed be responding to an unprecedented wave of bailouts, stimulus plans and other government efforts to reverse the slide.
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 such as auto making that were on the verge of bankruptcy, Ikenberry said.
Trading that was once furious also is stabilizing, based on the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. The index shows volatility remains twice as high as normal, but four times lower than last fall during the peak of the financial crisis.
“After big, precipitous declines in October and November, it really looks like the market is going sideways now,” Ikenberry said. “That reinforces that the market is taking everything into account and trying to look forward.”
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, he said.
“There’s still a lot of negative news on the horizon and there are still going to be negative contractions,” Ikenberry said. “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.”
Jan Dennis | EurekAlert!
Further reports about: > Chicago Board Options Exchange Volatility Index > Great Depression > banking system > economic health > financial crisis > financial markets > government initiatives > litmus test > nation’s economic climate > overreactions > stimulus plans > stock indexes > stock market trends > verge of bankruptcy > wave of bailouts
How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung
Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT
A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.
Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...
In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.
“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...
The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.
The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...
Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water
In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...
The efficiency of power electronic systems is not solely dependent on electrical efficiency but also on weight, for example, in mobile systems. When the weight of relevant components and devices in airplanes, for instance, is reduced, fuel savings can be achieved and correspondingly greenhouse gas emissions decreased. New materials and components based on gallium nitride (GaN) can help to reduce weight and increase the efficiency. With these new materials, power electronic switches can be operated at higher switching frequency, resulting in higher power density and lower material costs.
Researchers at the Fraunhofer Institute for Solar Energy Systems ISE together with partners have investigated how these materials can be used to make power...
16.11.2016 | Event News
01.11.2016 | Event News
14.10.2016 | Event News
02.12.2016 | Medical Engineering
02.12.2016 | Agricultural and Forestry Science
02.12.2016 | Physics and Astronomy