It is often said that the stock market is a barometer of the economy. Stock price changesnot only change with changes in the business cycle but can also indicatechanges in the business cycle. Empirical research shows that stock pricefluctuations are ahead of economic fluctuations. Often when the economy has notyet bottomed out, the stock price has begun to rise, which is mainly caused byinvestors' consistent judgment on the economic cycle. We usually call the stockmarket 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." Bothcan reflect on each other.
Due toresource constraints, people's expectations, and external factors, economicoperations will not always be in equilibrium. It often happens that the economyis in an unbalanced state. Correspondingly, the stock market also has thecharacteristics of fluctuating up and down.
When socialdemand continues to rise with the increase in population and consumption,product prices, worker wages, and capital owners’ investment impulse will allincrease. A concomitant situation is that investment demand increases andmarket capital prices (that is, interest rates) increase. The increase in wageshas caused personal consumption to increase again. The increase in enterpriseinvestment and the increase in personal disposable income have continuouslyimproved the quality of the physical economy, the efficiency of enterprises hascontinued to rise, and economic development has been further stimulated. Whenthe economy rises to a certain level, the growth rate of social consumptionbegins to slow down, the supply of products exceeds demand, and enterprisesbegin to reduce the scale of production, the demand for funds in the societydecreases, the price of funds falls, and the economy enters a downturn.
When thephysical economy is operating according to the above-mentioned cycle, thevirtual economy represented by the securities market is also operating in a drycycle, but the operating cycle of the securities market is much earlier thanthe physical economic cycle.