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Does the share market really matter?

24 Jul 2006
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Australia has about the highest recorded level of per capita participation in the share market in the world; a majority (55 per cent) of adult Australians own shares, either directly (44 per cent) or indirectly (Australian Stock Exchange 2005). Fluctuations in the value of oft-cited indices of market performance, the S&P/ASX200 and the S&P/All Ordinaries, will naturally be a matter of concern to these investors because share prices reflect estimates of future profits. Perhaps everyone, not just investors, should follow the twisting fortunes of the market because they also foreshadow what’s in store for the real economy. As it happens, the theory and evidence on the association between changes in share market prices and the economy do not support such an inference argues Raymond da Silva Rosa. There are at least three reasons why there is not a strong association between share market prices and economic growth: competition, market efficiency or rather inefficiency, and alternative sources of capital.

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2006
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