Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Markets still a good litmus test for the economy

04.03.2009
Don’t put much stock in rumblings that financial markets are a faulty barometer of the nation’s economic climate, a University of Illinois business expert says.

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 information:
http://www.illinois.edu

More articles from Business and Finance:

nachricht Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: New proton record: Researchers measure magnetic moment with greatest possible precision

High-precision measurement of the g-factor eleven times more precise than before / Results indicate a strong similarity between protons and antiprotons

The magnetic moment of an individual proton is inconceivably small, but can still be quantified. The basis for undertaking this measurement was laid over ten...

Im Focus: Frictional Heat Powers Hydrothermal Activity on Enceladus

Computer simulation shows how the icy moon heats water in a porous rock core

Heat from the friction of rocks caused by tidal forces could be the “engine” for the hydrothermal activity on Saturn's moon Enceladus. This presupposes that...

Im Focus: Nanoparticles help with malaria diagnosis – new rapid test in development

The WHO reports an estimated 429,000 malaria deaths each year. The disease mostly affects tropical and subtropical regions and in particular the African continent. The Fraunhofer Institute for Silicate Research ISC teamed up with the Fraunhofer Institute for Molecular Biology and Applied Ecology IME and the Institute of Tropical Medicine at the University of Tübingen for a new test method to detect malaria parasites in blood. The idea of the research project “NanoFRET” is to develop a highly sensitive and reliable rapid diagnostic test so that patient treatment can begin as early as possible.

Malaria is caused by parasites transmitted by mosquito bite. The most dangerous form of malaria is malaria tropica. Left untreated, it is fatal in most cases....

Im Focus: A “cosmic snake” reveals the structure of remote galaxies

The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.

Today, astronomers have a pretty accurate idea of how stars were formed in the recent cosmic past. But do these laws also apply to older galaxies? For around a...

Im Focus: Visual intelligence is not the same as IQ

Just because someone is smart and well-motivated doesn't mean he or she can learn the visual skills needed to excel at tasks like matching fingerprints, interpreting medical X-rays, keeping track of aircraft on radar displays or forensic face matching.

That is the implication of a new study which shows for the first time that there is a broad range of differences in people's visual ability and that these...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

Road into laboratory: Users discuss biaxial fatigue-testing for car and truck wheel

15.11.2017 | Event News

#Berlin5GWeek: The right network for Industry 4.0

30.10.2017 | Event News

 
Latest News

Lightning, with a chance of antimatter

24.11.2017 | Earth Sciences

A huge hydrogen generator at the Earth's core-mantle boundary

24.11.2017 | Earth Sciences

Scientists find why CP El Niño is harder to predict than EP El Niño

24.11.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>