Why the economy is falling but the stock market is rising?

why-the-economy-is-falling-but-the-stock-market-is-rising

Stock market rising – Recently, the Indian Stock exchange crossed the valuation of $3 trillion for the first time. And became the world’s 8th biggest stock market. Because of this growth, many people have invest in the stock market.

why-the-economy-is-falling-but-the-stock-market-is-rising

As you can see in this graph, the number of Demat accounts in India increased significantly in 2020. But what’s surprising is that while the stock market is flourishing. The economy has been going down. For example, India’s economy contracted by 8% last year. Moreover, 75 million Indians were pushed into poverty. And the middle class shrunk by 30 million. The pandemic isn’t the only instance. When there’s a disarrangement between the stock market and the economy. During the Kargil War between India and Pakistan, the SENSEX rose by 38%.

Stock market and economy

why-the-economy-is-falling-but-the-stock-market-is-rising

As you can see on the image, between April to July last year. While the economy was falling, the stock market was rising. It’s due to two reasons.

  1. First, the stock market isn’t about the entire economy.
  2. Second, the nature of the stock market and economy are different.

The stock markets are forward-looking and look towards the future. Whenever someone invests in the stock market. They think about the future of the corporates. Several investors in India believe that once the vaccine is readily available and when the lockdown lifts. The corporate profits will recover. However, the economic indicators are backward-looking. As the GDP data tells us what happened in the previous quarter or year. So the stock markets are forward-looking. While the economic indicators are backward-looking.

Why is the stock market rising?

There are three reasons why the Indian stock markets have been rising during the pandemic.

The first reason is the wealthy people

During the pandemic, the rich have cut their spending. We can use the data from America as an example. Since there are no such data available in India.

Between May and June 2020, the top 25% of the richest Americans cut their spending significantly. This isn’t surprising as the travel industry, restaurants, and shopping malls are shut. Since they aren’t spending the money. They can invest it somewhere. During an economic crisis, the most common response of a central bank is to lower the interest rates. This makes it easier for the commoners and businesses to get a loan and then spend the money. This way the economy recovers. But there’s another outcome too. In 2020, the net inflow from foreign investors was Rs. 1.4 trillion, the highest ever since 2002.

The second reason is Digitisation

The stock market rising because of digitization. Which has particularly helped technological companies. According to NASSCOM, the world’s digital adoption has jumped by 3-5 years due to the pandemic. Indians are readily adopting Zoom, Social media, Streaming Services, and digital payments. For example, digital payments increased by 80% in 2020. More than 1 million provision stores have begun to digitize. This increased digitization attracted foreign investment in companies like Jio.

In 2020, Jio managed to raise over Rs. 1 trillion. In fact, Jio attracted 50% of all private investments made in 2020. Hence, the SENSEX It index outperformed the general SENSEX index last year. And technology stocks aren’t the only asset class that flourished during the pandemic. The other asset class that flourished is Cryptocurrency. Since December 2020, the value of 1 bitcoin has doubled from nearly 130,000 to 260,000. Cryptocurrency has not only been accepted by the common people. But also by the big institutional investors who used to skeptical about cryptocurrency.

The third reason behind the stock market rising is New investor

During the 2020 lockdown, many students and youngsters, who had enough money and time, started investing in the stock market. Several mobile trading apps in the market have made stock investing easy. Zerodha, a popular app, revealed that in the first quarter of 2020, it only had 250,000 new investors. But by the second quarter, the number gose to 500,000.

Impact of the stock market rising

The stock market investments are risky too. The major risk could be Bubble. As the stock prices have risen dramatically around the world. Many fear that it could be a bubble. In its Financial Stability Report, the RBI asserted that Increased valuation of financial assets can impair the financial stability of any country. Not everyone agrees with this. Only time will tell if we’re in a stock market bubble or not. It’s difficult to predict it with 100% accuracy. But what’s clear is that there’s no correspondence between the stock market and the economy. The stock market indicates the situation of the wealthy people as they are the shareholders. Meanwhile, the working class is facing unemployment and poverty due to the pandemic.

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