Boom in Markets Despite Economic Recession?

Several economic models have been developed to understand the relationship between the stock market indices like NIFTY and SENSEX and the macroeconomic performance of a country expressed in terms of the GDP and other parameters.

- Dr. J K Goyal & Dr. Vinod Kumar

The underlying theory of all these models is that equity markets have their roots in the health of the respective economy. Therefore, long-term returns from the stock markets are generally in close consonance with the growth of the overall economy. “Stock markets are a barometer of the economic performance” is a well-established argument provided by financial analysts as well as seasoned economists. However, this A- priori belief of a positive strong inter-correlation between the GDP growth and the stock market performance is challenged many times. One such instance was when after the Sub-prime crisis of May 2009 the world economy remained depressed but the stock markets continued to boom for a fairly long period of time. A similar scenario has been witnessed again during the corona pandemic in 2020. After the initial crash in March 2020, the stock markets have been consistently rising since March 24th. Many an eyebrow are being raised and jaws dropped with this contrast of a quarter-on-quarter decline in the GDP numbers and the sharp jump in the stock indices.

The COVID-19 pandemic has had a significant negative impact on the world economy including the Indian economy. The GDP performance parameters across the world plummeted to levels never seen before. Even in India, the second-quarter numbers for FY 20-21 were highly demoralizing. A decline of 23% in Q1 followed by the contraction of 7.5% in Q2 placed India in its first ever technical ‘recession’ – term economists use to refer to a situation of two quarters of continued negative growth.