Years of training can be habit-forming in the way we perceive certain things. Many analysts, commentators, and investors, still tend to monitor stock market performance as closely related to the national economy, or even as a proxy thereof. This was for a long time reasonable and appropriate, and in aspects it still is.Â When the correspondence was clear and direct, it enabled us to estimate lags and proportions between the two sets of data, and to assess the leading or trailing influence of one on the other. We were also able to evaluate individual assets in relation to broader indices, ascribing the under- or over-performance to measures within an enclosed national framework. The relationship is no longer strictly realistic, and as the analogy has been distorted by a variety of factors, a truer analysis becomes much more complex.
It is now stating the obvious that the national economy and stock markets are influenced by international variables to a far greater extent than before, but what complicates and distorts the relationship between these two most, is that the impact of globalization is uneven. Companies are increasingly prone to see their revenues and expenses, directly or indirectly, impacted by cross-border issues in different ways – different currency exchanges, tax laws, and economic currents on both the inflow and outflow side of the ledger – and investors in these companies, meanwhile, are increasingly likely to reside in international jurisdictions, (and trade on international exchanges), which too present different circumstances and parameters. These investors are going to evaluate international alternatives in relation to local opportunities and risks, and the pools of finance from such overseas jurisdictions are increasing in cross-border influence.
Thus, both the supply of capital and the economic value of it in terms of the U.S. stock market, in terms of the S&P 500 for example, are bound to see volatility that is shaped outside of domestic borders in different ways. And as this often inconsistent relationship between international influences takes its toll, the parallels between local stocks and local economies begins to break… so, for example, like certain companies post improved earnings as a result of mass layoffs – which in the broader economic sense is negative – so too international exposure may be a positive for the performance of a stock, but may or may not have much real impact on the local economy.
Because companies can exist in multiple geographies while individuals cannot, because stocks represent companies rather than individuals, and because economies represent individuals rather than stocks, the relationship between stock markets and economies is likely to be increasingly disjointed. As these and similar trends in finance continue to take shape, there may be an increasing divide between “Wall Street” and “Main Street,” with consequences and repercussions that we probably don’t yet understand.