What Can the Stock Market Tell Us?

Over the last year the stock market has been on a wild roller coaster ride. The question is, Why is this so important?

Here is a good analogy for what stocks do: Pretend that the USA's economy is a car; the current recession is a very bumpy road (probably designed by Commerce City road developers); and the stock market represents the vehicle's shocks.

When the economy is good, there is almost no tension on the shocks and the passengers in the USA economy are driving smoothly and comfortably. When the vehicle exits the nice road and enters Commerce City, the shocks are knocked every which way and pounded into a pulp. This puts a lot of tension on the shocks and the passengers are whipped around and every once in a while thrown out of the car.

The stress put on the shocks of the car tells you how comfortable a ride the passengers in the vehicle will have. Similarly, when there is a lot of stress in the stock market, the USA's economy is put under a lot of stress BECAUSE STOCKS ARE USED AS COLLATERAL FOR INVESTMENT!!

When a corporation wants to invest, it needs to raise funds. On average, corporations only raise funds through selling shares of stock for 3% of their investments. Selling bonds is where the real money is made! Therefore, corporations tell potential bondholders that if anything ever happens to the company and they have to go bankrupt, the bondholders can take all of the stock that the corporation has. This means that when stock prices are high there is more collateral and more investment. When stocks are not worth much, nobody can invest and the economy does not grow.