The Stock Market

The level of stock market is the key economic indicator you listen about mainly often. You listen about it every particular day except you attempt hard to avoid the news.

The level of stock market is an index of expectations for future. Whenever stock market is high, investors look ahead to economic growth to be fast, profits to be high, and joblessness to be relatively low. (Note although, that there is an element of tail-chasing in stock market: maybe it would be more exact to say that stock market is high when average opinion anticipates that average opinion will expect that future economic growth would be rapid.)

For more than a century and quarter, the U.S has had a wide market in equities the "stocks" of a company, pieces of paper which indicate ownership of its shares. One of the most important indices which track the performance of stock market all together is Standard and Poor's composite index--the S&P 500. Figure Below plots the real value, which is the value, adjusted for inflation of this stock market index over time.

Over the history, on average, a share of stock has traded for about 15 times its past year’s, or trailing, earnings for each share. Earnings for each share are computed by taking a company's yearly profits and dividing by number of shares of stock the company has outstanding. The fifteen times earnings figure is just an average. Companies with excellent prospects for development sell for more than 15 times their revenues, and corporations seen as in decline sell for less.

There are a number of years in which expectations of future of economy are comparatively depressed, and stock indices e.g. S&P 500 sell for much less than fifteen times earnings rule of thumb. For example 1982, when the stock market as a whole was worth 40% less than 15 times earnings.

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