Question

It is said that economic crises (such as the economic recession) can be expected through the performance of financial markets in the period prior to them.

1- What is meant by that?

2- What is your personal opinion?

Answer 1

It is said that economic crisis can be expected through the performance of finance markets in the period prior to them.

1. What is meant by that?

Ans- This means that financial markets are a yardstick of economic performance as they are reflective of the major economic players,international economic scenario and investor sentiment. A positive investor sentiment means high asset prices , more investment and more growth.Whereas, falling investor confidence means low levels of investment leading to shortage of funds and hence economic crisis. The trends in the financial markets help to analyse the business cycles which goes hand in hand with the economic growth. Now the previous figures of financial market act as a basis for the forecast of future investor behaviour as the investors tend to invest in the market keeping in mind the previous time period performance. If the previous levels show a downward trend in financial market ,the investors expect a further fall and hence lower their investment levels . Due to this, the economy moves towards crisis amid negative investor sentiment. Hence, economic crisis can be forecasted through performance of finance markets in previous periods.

2. personal opinion.

Ans- In my personal opinion , financial markets are mirror image of the economic growth. A healthy financial market means economic boom and a suffering financial market means economic crisis. These Financial markets are linked to the movement of business cycles. Hence, the previous performance of financial markets can definitely be substantial to predict the future situation . However, it is does not hold true in cases of emrgency situations. In a sudden shock situation, a positive financial market can also crash down meaning no signs of crisis in previous performance can still lead to crisis. This is true in the present scenario of emergency due to spread of COVID-19 WHICH IS NOW A PANDEMIC. It has suddenly crashed the markets and pushed the global economies towards a crisis.