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: those who are able to generate wealth surplus to their primal needs of food, clothing and shelter have the opportunity to accumulate from that surplus, to invest.
How are markets created?
Holders of wealth form different perceptions as to value and/ or usefulness in the context of their individual (or family) situations: and they seek to optimise their holdings through buying or selling assets. The buying, selling or trading of investment assets gives rise to the markets, providing liquidity so that alternative opportunities can be explored.
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 – not just as an absolute statement of position, but on a comparative basis with many other economies around the world – and that this situation has been in place for more than twenty-five years (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 and employment opportunities (through agriculture, mining, manufacturing and retail), government and corporate stability, and our taxation and social security systems.
We acknowledge that many may have experienced financial or natural disasters in the past but contend that what hasn’t broken our spirit during those experiences has strengthened our resolve to deal with the future. When addressing the question as to the strength of the overall economy, we could all 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 you participate in a meaningful way, in the growth of the Australian economy over the next few years, seek an appointment with one of the experienced wealth management advisers at Continuum Financial Planners Pty Ltd. To arrange a meeting with one of our team, phone us on 07 3421 3456, or use the Contact Us form on our website to arrange an appointment; and/ or to be sent a Financial Health Checklist.
(First posted in February 2011, this article has been occasionally refreshed or updated, most recently in January 2019.)