Is there a relationship between Markets and the Economy?
Markets and the economy walk hand in hand – but not always lock-stepped. A simplistic relationship between these two terms is that –
- markets are where wealth is traded; and
- the economy is where wealth is initiated.
The economy needs to be strong to create wealth for its citizens. That wealth serves two key roles –
- generating wealth to service their needs for food, clothing and shelter; and
- create surpluses to accumulate and invest.
How are markets created?
Wealth-holders form different perceptions as to value and/ or usefulness of assets in the context of their personal situations. They seek to optimise their holdings through buying or selling preferred assets. The buying, selling or trading of assets gives rise to markets, providing liquidity for the development of investment opportunities.
Do Markets and the Economy reflect each other?
Markets have long been held as the forecaster of economic conditions to come. The timing between the two varies according to –
- the markets (be it property, company shares, credit – or Bonds, commodities, resources etc),
- the phase of the business cycle – and
- investor sentiment – but
is often said to be between five and nine months.
If the market participants see that the economy is growing strongly; and if they sense an opportunity to make a profit by trading on their perception, they will bid prices up.
If on the other hand, those market participants perceive that there are headwinds for economic activity (that may result in diminished profit or values), they will seek to sell down to avoid the worst of the decline.
The Australian Economy
We hold the view that the Australian economy is particularly strong. This is not just an absolute statement of position, but also on a comparative basis with many developed economies. The good news is that this situation has been in place, almost uninterrupted, since 1994.
In offering this proposition, we are considering the Australian economy as a whole –
- the financial institutions,
- the infrastructure (including utilities, roads, ports, rail etc),
- industries,
- employment opportunities (through agriculture, mining, manufacturing and retail),
- government and corporate stability, and
- our taxation and social security systems.
We acknowledge that many have experienced financial and/ or natural disasters in the past – and will continue to do so in the future. We contend that what hasn’t broken the Aussie spirit during those experiences has strengthened our resolve to deal with the future. When addressing the question as to the strength or otherwise of the overall economy, we could deliver responses that are either –
- ‘in concert’ with each other – or,
- vary to different extents, through to
- totally divergent views –
all of which are influenced by how we are personally experiencing life at the relevant time.
How did we come to this view about our economy?
The test for the Australian economy is how quickly and how effectively it recovers from the major setbacks that befall it.
Measures of reassurance include items that we are all able to see on a regular basis: unemployment is at low levels, near ‘full employment’; interest rates are somewhat stable; businesses are generally sound; and property prices are moving within reasonable ranges (albeit varying from City to City; and suburb to suburb).
Whilst a number of individuals and small businesses don’t feel that there is such strength in the economy, there is evidence that the majority – on a national basis – are improving their positions as the consequences/ effects of the GFC become more of a memory than a current event.
What does the future hold for the Australian economy?
As credit controls are managed by the authorities, small businesses and the property sector will experience the overall strength in the economy. Along with opinions of economists generally, the Reserve Bank (RBA) forecasts for GDP growth in Australia into the near-term future, reflect confidence that this is indeed a strong economy.
In the Global context, Australia should continue to benefit from its sound financial structure, efficient agriculture sector and resource-rich geology to participate in the slow, but certain recovery that is being reflected around the Globe. Our unique location so close to Asia ensures that the resource-hungry markets of China, India, Vietnam and others will sustain the strength of our economy in spite of occasional economic and political unrest in some of these customer economies.
Investing in Australian economic markets?
The inherent strength of the Australian economy will be reflected in its sharemarket for some time to come. Investment in Australian-based assets will no doubt, feature in the diversified portfolios of those pursuing a wealth accumulation strategy.
Your participation in Australian Markets and the Economy
To ensure your participation in the growth of the Australian economy, through investment, is strategically focused and effective –
- seek an appointment with one of the experienced wealth management advisers at Continuum Financial Planners, by –
- phoning our office, on 07 3421 3456, or
- at your convenience, use the linked Book A Meeting facility.
(This article was first posted by us in February 2011. It has occasionally been refreshed/ updated, most recently in February 2025.)
