Herd Immunity vs Herd Mentality

A lot of people believe that the stock index is an accurate reflection of the health of an economy.

If stocks were immobile and remained in the metric, then there would be a better justification for the assertion, but companies enter the FTSE 100 or 250 for the simple reason that they're doing well, are heavily capitalised and have access to multiple funding strands - things that are unavailable to the majority of smaller businesses. They leave the 100 or 250 because they're doing poorly. The fact the 100 and 250 comprise a fluctuating cohort of the best performing and most heavily capitalised companies that are best equipped to survive means it's a skewed measure. It's a small, unrepresentative sample and not the economy; you can't gauge the state of English football overall on the basis of the England team, which is the cream of the crop.

Then there's the factor of the herd mentality. A group of investors pile money into a certain share, for whatever spurious reason, and suddenly there's a flurry of activity that's not underpinned by any real-world performance, resulting in the price going up and that company possibly entering the 100 or 250. The GamSstop debacle is evidence of this, where Wall St is betting on GameStop failing, and hence initiating a short sell, but hundreds of thousands of home investors are stymying that by buying the shares and pushing them up to astronomical, and totally unrealistic values.

It's entirely feasible that the FTSE 100 or 250 could comprise solely companies in one sector that's performing particularly well and heavily capitalised, while the bulk of the economy is tanking.

This is borne out by the fact that stocks are rising while underlying economic indicators are showing poor performance in many world economies, such as employment figures, factory orders, GDP, consumer confidence, prices, etc.

Currency can be a better indicator of economic health, but not always, as Black Friday demonstrated so well. Currencies are also subject to speculative predation.

How about GDP. Well, yes - better than either stock markets or currencies, but GDP can count disasters as bonuses. A devastating catastrophe, for example, can result in massive government spending, resulting in GDP increasing on borrowing. Nor does GDP alone reflect the spread of wealth - a better indication is GDPPP, or GDP per person, but that is only useful as a comparison with other countries and still doesn't show how much wealth is owned by by what percentage - or the level of inequality. 

There again, despite the national wealth being owned by a small minority, wage inequality can be relatively low, so once more we run across problems in measurement.