Financial market activity rarely relies on the state of the global economy. Because financial markets do not follow any centralized authority, traders get to rise above the various issues plaguing the economy. This means, then, that economic performance is not entirely parallel to financial market conditions.
For instance, a GDP decrease, a significant criterion for a recession, does not automatically signify a similar downtrend in the financial market. Of course, digital assets, including forex and stock exchange, are linked to economic growth. However, since financial assets operate across countries and economies, traders are given more chances of riding out the storm. Trading activity continues—and may even be heightened—also when various economies are on the verge of imminent collapse and recession.
In fact, strong financial market activity can help mitigate economic decline. According to a report published by Federal Reserve Bank of San Francisco, “[w]ell-developed, smoothly operating financial markets play an important role in contributing to the health and efficiency of an economy.” Economic recessions do not typically result in a financial market collapse. Instead, strong financial market conditions can aid in uplifting a declining economy.
Economy and the financial market
Indeed, the economic decline does not readily signify the financial market collapse. However, there is a strong connection between both. Because finance works independently from the economy, traders can continue trading activities despite current issues concerning any specific economy and may even profit from sudden volatile conditions that plague it.
For instance, during the early onset of the 2019 novel coronavirus (COVID-19) pandemic, the financial market saw pointed rise inactivity. Statistics indicate that despite the rapid increase in COVID-19 cases in the US, reaching almost 5 million, being the country with the current highest COVID-19 affected individuals, a flurry of financial market activity is observed.
With the start of this year’s third quarter, US stock prices experienced a sudden increase. Investment experts predict a continued jump in digital asset prices despite the escalating unemployment and bankruptcy rates.
Market volatility and investment gains
Veteran traders know that heightened market volatility signifies increased opportunities for gain. With the looming threat of recession due to the massive business closures worldwide coupled with increased unemployment and the need to prioritize basic necessities, digital asset investment has become even stronger.
Alongside the declarations of necessary lockdown protocols mandated to halt COVID-19 transmission is the increased dependence on digital transactions via the internet. Thus, various financial markets are now crowded with investors looking for other viable investments available. Various digital assets have appeared, and different trading platforms now offer different tools that aim to make online trading far more straightforward.
“With the increasing number of cryptocurrencies and exchanges, an increase in trading and investment opportunities are arising for traders and investors. There are different types of strategies that can be taken advantage of, and choosing the right one will help increase the profitability of the cryptocurrency investment. Understanding what the strategies and risks are will help grow an investor’s assets exponentially and, in effect, grow the cryptocurrency market as a whole,” asserts Prance Gold Holdings in their recent 2020 Analysis Report.
Indeed, traders continue to make sustainable investments via the different financial markets irrespective of the daily laments concerning predicted GDP collapse due to extensive reports of business closures and job curtailments.
Bear market versus recession
Nonetheless, it is essential to differentiate a bear market from the recession. “A recession describes a slowdown in economic output and is generally defined as at least two consecutive quarters of decline in the gross domestic product, or GDP, which functions as a measure of economic health. On the other hand, a bear market describes a stock market decline as a result of negative investor sentiment,” a MorningStar report states.
Although these two can go together, especially in unprecedented situations that affect vast chunks of the worldwide population, they are not synonymous and automatically parallel to each other. This can be better explained by pointing out the sudden increase in digital asset investment despite the rapid jump in COVID-19 infections. In a sense, digital investment has become even more robust due to the massive restrictions placed on offline business trades all over the world.
Takeaway
Financial markets are not heavily dependent on GDP performance. Despite the present economic decline all across the globe, continuous trading activities, as well as the rise in digital asset prices heavily support the possibility of financial solutions via participation in more digital investments. As more and more traders look on the internet to find other sustainable assets to invest in, eventual economic collapse may still be apprehended.