Stock Market Going Up and Economy Going Down in India. One can Say there are two factors.
One, the Sensex and Nifty indexes are the indicators of the top 50/30 companies in the country.
Not necessarily a solid indicator of the economy as a whole, right?
For example, how would things like unemployment or food inflation reflect in the stock market index?
Two, tax cuts lead to higher than expected earnings report for the quarter. This would result in increased share prices. That said, it should eventually correct to take into account the economic situation, should it persist longer. Stocks don’t correct because of economic situation. They generally predict six months in advance. The Stock Price is generally a lagging indicator. It does not predict the company’s or economy’s future health, it reflects the changes after something happens.
Rakesh Jhunjhunwala and Prashant Jain of HDFC AMC. Both say it is a leading indicator. When you buy a stock, you will buy based on the future prospects not on the past performance. Why do you think AMC stocks, Life insurance stocks are trading at high P/E. People expect them to do well in future.
Stocks trade as per market expectation but do correct when they don’t perform accordingly. People predict how that company would do in the future given the info they have and invest in stocks. Buy or sell. Which brings the stock to a certain price.
Now, say there’s news of low revenue / earnings due to poor economy, then the stock price will react to the news and fall as people would want to sell.
That is, after there’s news that economy has slowed down, then comes the reaction in the stock market. Ergo lagging indicator. Not a large time difference but still a lag.
Similarly, after tax cuts have been announced, the earnings suddenly increase which brings with it extra cashflow, possibly higher dividends too so stock price goes higher.
After the tax cut announcement. It’s very much a lagging indicator.
A better indicator could be S&P BSE 100 and also looking at small and mid cap indices. Only a few stocks are pulling up the sensex and nifty. Rest of them are all at rock bottom.