Equity markets reflect underlying business cycle trends from "summary" of Business Cycles and Equilibrium by Fischer Black
Equity markets are not independent of the economy; they are closely tied to the underlying business cycle trends. When the economy is booming, businesses are flourishing, and profits are high, equity markets tend to rise. This is because investors have confidence in the companies they are investing in, believing that they will continue to perform well in the future. On the other hand, when the economy is in a downturn, businesses are struggling, and profits are low, equity markets tend to fall. This is because investors fear that companies will not be able to weather the storm and may even go bankrupt. The relationship between equity markets and business cycle trends is not always straightforward. There can be a lag between changes in the economy and changes in the stock market. For example, the stock market may continue to rise even as the economy is starting to slow down, as investors are slow to react to changing conditions. Similarly, the stock market may continue to fall even as the economy is starting to recover, as investors remain pessimi...
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