Economic Growth vs. the Stock Market

As the stock market climbs out of its tariff-induced April slump, many are hailing the return of a strong economy. Investors should be wary of unbridled optimism, since the Fed is still liable to fire up the money printers.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

Most financial commentators are of the view that increases in the stock market translate to an increase in economic growth. The reason is because the increase in stock prices lifts consumer and business optimism, which, in turn, boosts consumer and business demand for goods and services. This, in turn, strengthens the economy. But is it valid to hold that what drives the economy is the demand for goods and services?

If an individual in a market economy wants to secure consumer goods and services he wants, he must produce something useful that can be exchanged for those goods and services. In a market economy, every individual must be a producer first before he can exercise demand. Producers ultimately pay with goods and services in order to exchange them for other previously-produced goods and services they want. This is true even if they exchange money for goods since the money simply acts as a medium of exchange. It is an increase in the production of goods and services that sets in motion an increase in the demand. According to David Ricardo,