GRAND RAPIDS, MICH. - The stock market plays a big role in the financial well-being of our country, and our own portfolios. Many people have a basic understanding of how it works, but don't know the things that influence its ups and downs.
WZZM 13 sat down with Laina Mills from Legacy Trust in Grand Rapids to talk about how the international economy plays a part in the stock market's performance.
The stock market can seem completely unpredictable to the average observer. Often, the way people follow the market is on the evening news when they hear the day’s gain or loss reported. The problem with that approach is that markets often move in the short-term based on the headlines of that particular day, leading to a misperception about what really drives stock prices long-term.
The average investor in the stock market is saving for retirement, often through a 401(k) account or an Individual Retirement Account (IRA). That person usually has many years of investing before they need to use the money in the account. Over that kind of time frame, the “noise” of day-to-day news fades away and stock market gains are ultimately tied to a healthy and growing economy.
Economic growth is driven by a growing workforce, gains in productivity, and innovations in technology.
While the economy won’t grow in a smooth upward line – it will go through boom and bust cycles just like the stock market. History has shown time and again that setbacks are temporary on the path toward long-term growth, which has in turn driven substantial stock price appreciation over the years.
The worst economic downturn of our lifetimes, the Great Recession, lasted just 1.5 years before the U.S. began to turn the corner toward growth again, leading to a historic stock market rally that kicked off in 2009 and is now in its eighth year.
The international economy was generally slower to recover than the U.S. but we are seeing many signs that things are picking up overseas as well. Employment, consumer spending, and manufacturing activity are showing meaningful improvement in many regions outside the United States. This improvement in the international economy could easily drive further stock price gains. The American companies that make up the S&P 500 index earn 30% of their revenue from other countries, so improvements overseas are good for us here at home too.
The key takeaway is this, despite the apparent randomness of stock prices when viewed in the short-term, a long-term pattern of growth tied to the global economy persists and will continue to do so.
By investing in the stock market you’re essentially betting on the long-term success of human capital and innovation, and you will be rewarded for that bet if you stay committed.
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