How the growing disconnect between robust stock markets and the real global economy affects you
Most economies are witnessing their worst-ever decline in performance, as evidenced by increasing unemployment, decreasing consumer spending, shrinking GDP, and an uncertain business outlook. On the other hand, the world’s largest equity indices, for example, the S&P 500, MSCI, and Euro Stoxx 50, have increased by almost 60% since their temporary crash in March 2020. The S&P 500 index lost a third of its value from 19 February 2020 to 23 March 2020, but has recovered more than half of its losses since then without a break. The world has probably never seen such a divergence between markets and economies as now.
This paper highlights the fundamental principles on which stock markets and the real global economy work and the factors contributing to the growing disconnect between the two.
- The major central banks are injecting trillions of dollars into their respective financial systems through asset purchases and stimulus packages to ensure market optimism
- Abundant liquidity across the globe has led investors to look for investments promising higher returns, and with low interest rates on savings accounts, most of the money is making its way into capital markets
- The Fed’s monetary policies have increased speculative activity in the stock market; this could cause asset bubbles, making investors invest heavily without differentiating between a good borrower and a bad one
- Flooding economies with cash would enhance growth forecasts but pose the risk of rising inflation
Pratiksha Motwani, Associate
She is currently working in the Investment Banking team at Acuity Knowledge Partners and has over 2 years of experience within the financial service industry. Her area of expertise spans across mergers & acquisition, financial valuation, industry research and company studies.
She holds a MBA in finance from Birla Institute of Management Technology and a Bachelor’s degree in Economics Hons from Delhi University.