Market Performance v/s Economic Performance
Economic performance and stock market performance have witnessed informal debates in the society whether the rising market performance is justified compared to the falling or at least stagnant economic performance of India amid rising COVID cases. There are broadly two beliefs regarding the relationship between India’s economic performance and market performance. One that talks about the causation – if the economy performs well, the market performs well too and vice versa. And two, the correlation – positive market performance may or may not lead to positive economic performance, though the market may contribute to the economy’s performance in certain ways or to a certain extent, and vice versa.
While economic performance represents the country’s holistic performance in terms of production, exports, imports, unemployment, M&As, etc., market performance is restricted to the returns generated through stock market trading of equities, futures, options, mutual funds, etc. The stock market instruments are related to the performance of the economy’s companies, commodities, etc., and hence the market’s performance must be in line with how the underlying company, commodity, etc. perform.
The argument is justified in theoretical terms that the stock market must show the true performance of the underlying company, commodity, etc. However, this has been proven wrong because the market is performing well while the Indian economy is still struggling. The stock market today is more dynamic than it ever was with millions of investors dealing in the instruments. While some may genuinely consider the true performance of the company (for example) by running economic models on the financials, most of the other investors look at the historical trends in the prices and take positions based on past price performance following the principle of – history tends to repeat itself. The core difference between the two approaches is that while the latter is backward-looking, the former focuses on the future.
While the economy is underperforming due to genuine fall in production and employment rates due to COVID, the market witnessed major crashes initially and later bounced back maybe because of another principles of ‘buy cheap, sell at higher price’ and ‘history tends to repeat itself’ and not because of the true performance of the companies. On the other hand, the IT industry, certain logistics companies, companies providing essential products, etc are genuinely performing well and their stocks are hence, performing well leading the positive market performance.
Hence, it is clear that market performance is justified considering the beliefs and mechanisms investors follow in taking positions. The positive market performance may attract FDIs, and improve the condition of the economy. However, the government policies, if unfavourable, would not attract enough investment despite a wonderful market performance. Market performance may help boost the economic performance, however, it can alone not contribute to the upliftment of the economy. On the other hand, the economy may be performing well, but if the price seems to have been peaked or if a negative rumour spreads in the economy, the market may underperform. Hence, there is no causation between the two. Both are correlated in ways that one’s upliftment instills hope for the other’s upliftment only with added efforts and changes.
The aim is always to converge the economic performance to market performance for synergetic and speedy growth of the economy, however, it is almost always impossible to do so. The best a country can do is try to be in the same direction as its market, preferably upwards; and try to regulate/control high volatility in the market so as to avoid huge losses, that take a toll on the currency value, to the investors and ultimately the nation as a whole.