It is often said that the stock market is a barometer of the economy. Stock price changes not only change with changes in the business cycle but can also indicate changes in the business cycle. Empirical research shows that stock price fluctuations are ahead of economic fluctuations. Often when the economy has not yet bottomed out, the stock price has begun to rise, which is mainly caused by investors' consistent judgment on the economic cycle. We usually call the stock market a virtual economy and the real economy against it as a physical economy. The relationship between the two can be said to follow each other." Both can reflect on each other.
Due to resource constraints, people's expectations, and external factors, economic operations will not always be in equilibrium. It often happens that the economyis in an unbalanced state. Correspondingly, the stock market also has the characteristics of fluctuating up and down.
When social demand continues to rise with the increase in population and consumption, product prices, worker wages, and capital owners’ investment impulse will all increase. A concomitant situation is that investment demand increases and market capital prices (that is, interest rates) increase. The increase in wages has caused personal consumption to increase again. The increase in enterprise investment and the increase in personal disposable income have continuously improved the quality of the physical economy, the efficiency of enterprises has continued to rise, and economic development has been further stimulated. When the economy rises to a certain level, the growth rate of social consumption begins to slow down, the supply of products exceeds demand, and enterprises begin to reduce the scale of production, the demand for funds in the society decreases, the price of funds falls, and the economy enters a downturn.
When the physical economy is operating according to the above-mentioned cycle, the virtual economy represented by the securities market is also operating in a dry cycle, but the operating cycle of the securities market is much earlier than the physical economic cycle.