Now a days, some confusion is there....The fundamental analysis is being questioned as in various economies it has been observed that economy is not performing good, but still the stock markets index is moving up, Why So. It seems that Stock Market index moves ahead of the economic happenings ,however, related to that
In some emerging markets, the stock market is not representative of the economy. If the stock market represents all the companies in the economy, it should depend on the economy- through earnings and earnings is reflected in GDP calculation. Interest rates affect earnings, stock market and economic performance.
Yes, the stock markets depend on the economy, but in a country like India which is a very emotional market sometimes reacts to the presence of Information. Both Good and Bad.
So the hope of coming out of the pandemic with the vaccine has also added to it
Index moving up, while economy plummets, is quite simple to understand if one considers the nature of an index and of the stock market.
Index is most commonly an assembly of the most performing stocks in a category. No matter what happens, in any set there would be some samples outperforming the others. The subset is just a statistical reality. If some samples fall behind over time, they are being replaced by some better ones. In the long run, index includes exclusively top performing stocks.
Market is a more complex instance. As a simplification, it is a representation of our overall production capacity. In other words, stock modulates our collective ability to create/maintain wealth and well-being. When everything goes to hell, the undying hope for a better life drives investments in what holds ground. That means, stock market becomes a two-speed phenomenon. The most performing stocks become humanity's last resort option and draw overwhelming attention, while the remained stocks are dumped. When economy is not performing good the overall stock market size(value) may decline, but the most performing stock increases its value. And it exactly coincides with the principle how an index is formed.
The discrepancy between top and low performing samples is so mighty that even if the set is a toast, its index subset might go up. That is, at the time of rapidly sinking economy, people anticipate a market collapse. The former stock tycoons would be reduced to mediocre players. At the same time they might possess a rare quality - they survive and pull off the well-being recovery later. So much being said, some people bet on the effect and rush to enter ahead of the others for better gains. This could explain the moves ahead of a fact.
In some emerging markets, the stock market is not representative of the economy. If the stock market represents all the companies in the economy, it should depend on the economy- through earnings and earnings is reflected in GDP calculation. Interest rates affect earnings, stock market and economic performance.
Speculation does not depend on the economy. Otherwise, Capital markets momentum depend upon several macroeconomic indicators.
The economy s certainly a factor. Also how each sector is doing within the economy can effect specific stocks.
Stock markets are forward looking. As such, one should not expect what happens in the economy TODAY to be affecting the stock market TODAY.
Stock markets can lead or lag the real economy, and this has to do with how quickly information is revealed and communicated to all relevant economic agents. Prior to the US subprime crisis Credit Rating Agencies (CRA) only very few days before companies became bankrupt were issued AAA ratings. In the European Sovereign Debt crisis and before the EU decided how to handle the Crisis, CRAs were very aggressive in downgrading the sovereign bonds of several Eurozone countries fueling the crisis.
I would like to respond to this question from a slightly different angle. As an experienced strategy, finance and risk management professional, I would say some of these indices we see on the stock markets are "doctored" both at the individual company level and exchange level. Majority if not all of the indices are based on financial performances, these performance ratio have been fingered to ensure most coprorates look good on paper while in fact they re not as good. Which Bourse woul want to openly admit this...when the implication alon is far reaching. Only when it is obvious that no other escape route. Have we wondered the very many corporate scandals of the past; the reason they became a scandal is that they have gotten to irreparable / irrecoverable levels and all effrots to continue to "cook the books" is not looking sustainable. Stock markets leading or lagging the economy may not be a true reflection of reality. I may be playing the devil's advocate here, but from my forensic auditing , fraud investigation and control environement review, stock market movement may not be telling a true story.
As a follow up to what I mentioned in my previous comment I like to add the following.: In the long run what really matters is the performance of the real economy which will determine the direction of the stock market, as well as other financial markets such as the the foreign exchange and bond markets.
George K Zestos
There are few examples worldwide where the Stock market goes extremely well while the economy struggles. The Stock market discounts a "good prospect" of the economy and, in general, incorporates all the available information concerning the expectations. Especially in emerging markets, the stock market's Index may have an unexpected upward course but still, it incorporates the potentiality of the economy in the forthcoming period.
Stock market shows the expectation of market and shows it`s vector direction. So Stock Markets depend on the Economy rather like rate of increase or decrease
As is often the case, the answer is more nuanced than a straight yes or no. Here are some thoughts:
1. In developed markets, such as the US, where the listed companies broadly reflects the US economy, stock prices reflect how the earnings is expected too evolve. In turn, earnings may track how the economy will be doing if the underlying business of the company is highly geared to the US economy.
2. This relationship breaks down when the underlying business of the firm is global in nature, and its earnings are coming from markets with a weaker correlation to the US (or its country of listing).
3. Foreign companies with businesses outside the US (or the listing country) are likely to evolve with how their earnings behave - most likely influenced by the markets where they do business, rather than in the country where they are listed.
4. Highly regulated firms are likely to have their share prices evolve with the regulatory developments.
5. Within the same market, and industry, the firm's performance will depend on how it is managed, and how the mix of their earnings reflect the industry's performance.
Trust this helps to clarify.
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