How the stock market price influences our daily expenses

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With some friends and professional contacts, I sometimes have discussions about how stock market prices and the flash crashes that come with them don’t really affect the physical world. According to them, it is a separate system, a kind of parallel universe of numbers, charts, and speculation that has little to do with our daily lives. I often disagree. That’s why I thought it would be useful to write this blog, in which I explain how strongly this so-called ‘virtual’ market influences our real world, from the price of a loaf of bread in the supermarket to geopolitical relations.

This view is supported by researchers and economists who emphasize that financial markets have a direct impact on the real economy, even though they are sometimes seen as ‘virtual’ (Investopedia, n.d.; RBC Global Asset Management, n.d.; Journalist’s Resource, 2021). As Investopedia states: “Wall Street is the trading hub of the biggest financial markets in the world’s richest nation, and its movements have a significant impact on the global economy” (Investopedia, n.d.).

Let’s take oil and its price as an example. Oil is traded globally on so-called futures markets such as the New York Mercantile Exchange (NYMEX) or the Intercontinental Exchange (ICE). Here, contracts are made in which parties agree to buy or sell oil at a predetermined price at a certain point in the future. This price is determined not only by actual supply and demand, but also by expectations, emotions, geopolitical tensions, and importantly, speculation by large investment firms and hedge funds.

The role of speculation and expectations in commodity price formation is widely recognized in the financial markets literature (BlackRock, n.d.; Investopedia, n.d.; RBC Global Asset Management, n.d.). As BlackRock writes: “Equity markets are influenced by a range of factors, including economic data, geopolitical events, and investor sentiment, all of which can drive price movements in commodities like oil” (BlackRock, n.d.).

What many people underestimate is that the price set on these financial markets is actually considered the reference price for physical oil worldwide. Whether it is a barrel of crude oil shipped from Saudi Arabia to Rotterdam or a shipment from Texas to Asia, everywhere this market price is used as the basis. The trading of these paper contracts, which at first glance might seem disconnected from reality, directly influences the price at which physical oil is bought and sold. This is also supported by studies showing that futures markets determine the pricing of physical commodities worldwide (Investopedia, n.d.; RBC Global Asset Management, n.d.; OnPoint Credit Union, 2024). As Investopedia states: “The price set on these markets is the benchmark for physical oil transactions globally” (Investopedia, n.d.).

One reason people often give for believing that stock market prices do not affect the real world is that they are ‘just numbers on a screen’ and do not involve physical goods. But that is precisely the power of financial markets: they set price expectations. The price on the screen literally becomes the basis for physical deals. The virtual price is thus widely passed on to the physical world. This is again confirmed by economists who emphasize that financial markets guide price expectations and thus influence the real economy (RBC Global Asset Management, n.d.; Journalist’s Resource, 2021; OnPoint Credit Union, 2024). As RBC Global Asset Management writes: “Stock market prices reflect expectations about future economic conditions, and these expectations can influence real economic activity” (RBC Global Asset Management, n.d.).

Another important factor is that much of this price formation no longer comes from flesh-and-blood people manually entering orders, but nowadays often from so-called high-frequency traders. These are ultra-fast trading computers that react to market signals with millisecond precision. These computers are programmed by so-called quants, experts in quantitative finance, who build complex algorithms to respond instantly to economic news, social media updates, or even rumors on financial blogs. For example, as soon as an unexpected tweet appears from an influential politician about tensions in the Middle East or an oil deal, these systems can execute massive buy or sell orders within fractions of a second, even before a human has read the message.

The influence of high-frequency trading on price formation and market volatility is extensively documented in the financial literature (Bank for International Settlements, 2011; Kirilenko et al., 2017; Menkveld, 2013). As the Bank for International Settlements states: “High frequency trading can amplify price movements and increase market volatility, especially during periods of stress” (Bank for International Settlements, 2011).

A second frequently heard argument is that the stock market is separate from the local economy. People often say: “What happens on Wall Street has nothing to do with my local baker.” This is also not true. When the oil price rises on Wall Street, energy prices rise worldwide, including the energy costs of local businesses. Think of the baker who fires his oven with gas, has his flour transported by diesel trucks, and uses plastic packaging made from oil. You see those higher costs reflected in the store.

This is confirmed by economic analyses showing that price increases on financial markets directly affect the cost structure of companies and ultimately the prices consumers pay (Investopedia, n.d.; OnPoint Credit Union, 2024; RBC Global Asset Management, n.d.).

That all means that, to stick with the example of oil, the oil price has often already risen or fallen dozens of times before an ordinary trader or consumer can even respond. As a result, it is often difficult for the average citizen or entrepreneur to respond quickly and rationally to market changes. The system is, after all, geared towards speed, data analysis, and automated decisions, which leads to enormous volatility and price movements that are much faster than the traditional image of market trading suggests.

This dynamic is underlined by research into the speed and volatility of modern financial markets (Bank for International Settlements, 2011; Kirilenko et al., 2017). As the Bank for International Settlements states: “Automated trading systems can react to news and events much faster than human traders, leading to rapid price changes” (Bank for International Settlements, 2011).

A third line of thought that is often mentioned is that financial markets are only speculation and therefore ‘not real’. But speculation determines expectations, and expectations are fundamental in economic processes. If investors expect oil to become more expensive, they will already buy or hedge with contracts. That causes price increases even before actual demand rises. The effect is real, despite the speculative nature.

This is confirmed by economists who emphasize that speculation plays an important role in price formation and market efficiency (RBC Global Asset Management, n.d.; Journalist’s Resource, 2021; OnPoint Credit Union, 2024). As RBC Global Asset Management states: “Speculation can help markets discover prices and provide liquidity, but it can also lead to price bubbles and increased volatility” (RBC Global Asset Management, n.d.).

Oil, for example, is present everywhere. Not only at the pump, where you immediately notice that refueling becomes more expensive when the oil price rises, but also in all layers of the economy. Think of transport: trucks delivering goods to supermarkets run on diesel. Think of airline tickets that become more expensive because kerosene becomes more expensive. But it goes further. In agriculture, oil is used to power machines such as tractors and harvesters, but also as a raw material for fertilizer. In industry, machines depend on energy that partly comes from fossil fuels. Even in the packaging of products, such as plastics, oil is processed.

A fourth misconception is that prices on the stock exchange often correct quickly, so it is not that bad. But even temporary price spikes have direct consequences. Contracts are sometimes concluded months in advance at a certain price. If panic breaks out today and oil temporarily rises by 30 percent, there are companies that have to conclude contracts at that moment. The cost price for their production thus rises permanently, even if the price drops again a week later.

Let’s now take it a step further and use the example of something as simple as a loaf of bread in the supermarket. The ingredients often come from different countries: flour from Germany, sunflower oil from Ukraine, salt from France. All of them are transported, often over long distances, where fuel costs play a major role. The bakery where the bread is baked uses ovens that consume energy, sometimes directly from gas or oil-fired power plants. The packaging consists of foil or plastic, both derived from petroleum products. Finally, the end product must be transported to distribution centers and then to the stores. If the oil price rises, all that logistics becomes more expensive and that difference is passed on. The consumer ultimately pays more for that one loaf of bread. Not because there is a direct shortage of bread, but because the oil price on the stock exchange has risen.

This example is supported by economic analyses showing that price increases on financial markets directly affect the cost structure of companies and ultimately the prices consumers pay. As is often mentioned in the literature: “Higher energy prices increase production and transport costs, leading to higher prices for consumers.”

A fifth and final claim I often hear is that central banks and governments can intervene, so it is not that bad. That is partly true, but they, banks and governments, usually only respond afterwards, after the damage has already been done. When prices rise and inflation occurs, the central bank raises interest rates. At that point, costs for companies have already risen, wages have often lagged behind, and purchasing power has decreased. The corrective effect therefore often comes too late to ease the initial pain.

Such factors affect the entire production chain and lead to price increases in all kinds of areas. When many goods become more expensive, inflation arises. Central banks can then decide to raise interest rates to slow down the economy, which in turn affects mortgages, investments, and consumer confidence. In other words, what starts as a price fluctuation in the oil market can ultimately affect our monthly expenses, employment in our region, and even the growth of the world economy.

It is important to understand that this principle does not only apply to oil. The gold price is also largely determined on the futures market. The price of a physical gold bar in a shop in Amsterdam or Dubai is directly linked to what happens on the world market. If investors massively flee to gold due to economic uncertainty and the price rises on the stock exchange, then a gold ring or coin in a jewelry store also becomes more expensive, even if local demand has not increased.

The same applies to other commodities such as wheat, corn, or even currencies. The euro-dollar exchange rate is determined on the currency market, and that rate determines how much we pay for imported products or how competitive our exports are. Fluctuations in these markets can lead to higher prices for bread, clothing, or electronics, simply because the value of money has shifted.

In short, prices on the stock market are anything but disconnected from the real world. They are a system that permeates every link of our economic and daily reality worldwide. Anyone who thinks it is just a game for day traders and financial institutions underestimates how deeply these markets are intertwined with everything we do, eat, make, and use.

Would you like to know more about this topic? I will do my best to post more relevant blog articles soon.

Also feel free to read my other blog about 2026: a year of challenges and opportunities.

 

Sources:

• Bank for International Settlements. (2011). High-frequency trading in the foreign exchange market. https://www.bis.org/publ/mktc05.pdf
• BlackRock. (n.d.). Equity Market Outlook. https://www.blackrock.com/us/individual/insights/equity-market-outlook
• European Central Bank. (n.d.). The transmission mechanism of monetary policy. https://www.ecb.europa.eu/explainers/tell-me-more/html/transmission_mechanism.en.html
• Federal Reserve. (n.d.). How does monetary policy influence inflation and employment? https://www.federalreserve.gov/faqs/money_12856.htm
• Investopedia. (n.d.). Why Wall Street Is a Key Player in the World’s Economy. https://www.investopedia.com/articles/investing/100814/wall-streets-enduring-impact-economy.asp
• Journalist’s Resource. (2021, January 11). The stock market is not the economy. Right? Here’s what research says. https://journalistsresource.org/home/stock-market-not-economy/
• Kirilenko, A., Kyle, A. S., Samadi, M., & Tuzun, T. (2017). The Flash Crash: High-Frequency Trading in an Electronic Market. Journal of Finance, 72(3), 967-998. https://doi.org/10.1111/jofi.12498
• Menkveld, A. J. (2013). High frequency trading and the new market makers. Journal of Financial Markets, 16(4), 712-740. https://doi.org/10.1016/j.finmar.2013.06.006
• OnPoint Credit Union. (2024, April 18). The Impact of Global Economic Trends on Personal Investments. https://www.onpointcu.com/blog/the-impact-of-global-economic-trends-on-personal-investments/
• RBC Global Asset Management. (n.d.). What’s the relationship between the stock market and the economy? https://www.rbcgam.com/en/ca/learn-plan/investment-basics/whats-the-relationship-between-the-stock-market-and-the-economy/detail