Market Risk vs. Economic Risk

Market Risk and Economic Risk are related.  If this is a fair match-up, which risk factor is the more dominant of the other? Which risk is the heavy-weight?  Is one risk more of a function of the other risk?   Market risk is the fluctuation of investment returns caused by factors that affect all classes of assets being traded.  In a larger context, economic risk is the fluctuations in general economic conditions that eventually affect investments and asset classes of all types.  Such conditions include, but are not limited to, political stability, exchange rates, government regulation, taxation, comparative advantage, natural disasters, technological change and adoption, propensities to consume or save, money and banking, etc.   All these factors, even possible good luck, help comprise macroeconomic instability.  We can reasonably conclude that such economic risks help drive additional market risks.

We believe the economy mostly drives the markets in the long-run.   In the short-run, we believe that the markets have “priced-in” the information that the general economy is providing to manage risks.   In a published research classic from The Vanguard Group, Inc., entitled “Macroeconomic Expectations and the Stock Market: The Importance of a Longer-Term Perspective” © 2008, these two perceptions (and more) are analyzed, correlated and thoroughly tested by Jos. H. Davis, PhD.   Contemporaneous to the outbreak of the Great Recession, the research outcomes and conclusions are unexpected.  Read More.