Does the stock market reflect the real economy

An economy is about the production of goods and services in a country. In a market economy, the goods and services are mostly produced by companies.

The stock market generally comprising the better companies in an economy. If the economy does well you would expect these companies to do well and vice versa.

Of course, in the short term the stock market is affected by market sentiments. But in the long run you would expect the stock market to reflect the business fundamentals which in turn is linked to the economy.

Well, this is the descriptive part. Does the number show this? The chart below shows the Bursa Malaysia KLCI and the Malaysian GDP in current USD from 2000 to 2022.

You can see that they share similar patterns although there is no exact year-to-year match. In fact, there is a 0.88 correlation between them.

What does it mean for an investor?

• Invest in a growing economy to have better chances of making money.

• Invest in the long-term.

• The KLCI should be up-trending in the coming few years given that the GDP over the past 2 years is trending up.