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valuations of individual companies, and the stock market as a whole, are the discounted value of projected future cash flows for the relevant entitiy.  To the extent that capital stock would support those forecasted cash flows, I guess you could say there is a relationship.  But other factors are more important--the projections themselves and the discount rate being used to discount the projections, for example.  (In particular, the importance of the discount rate, and the risk premium component of the rate, are critical.)
Reporters think the stock market is some sort of perfect indicator on the health of the economy.
The operative word here is "think".  I'm not sure reporters in general think, and I know Jerome goes crazy about some of the comments they make in the area of economics.  The stock market is somewhat related to the health of the economy, but just a little thought shows it's not logically a perfect relationship.  First, the stock market's value is an estimation of the future--when we talk about the economy, we're often talking about the present,,,,"GDP grew 3.6% this quarter", or something like that.  Second, and this is more and more true as the world becomes more global, companies on the Dow Jones, the S&P 500,, etc. have a great deal of their sales and production outside of the US.  It's not at all uncommon for 50% of a companies sales to be outside the US, nor for 50% of production to be outside the US.  So while the stock market is normally related to the domestic economy, it's not even meant in theory to be "a perfect indicator on the health of the economy".
by wchurchill on Sun Oct 8th, 2006 at 12:52:12 PM EST
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