Why do markets rise when economies slump?

In the midst of this pandemic, markets and the economy have moved in complete opposite direction to each other. So, what on earth is going on?

Forward looking

Well, markets are forward-looking, and share price reflects all the future earnings of a company. So, if there’s any news that impacts those expectations, it can move markets before it actually shows up in financial statements, and that’s exactly what’s happened.

Most of the bad news was already captured when markets crashed in the first quarter of 2020, as investors anticipated the economic slump ahead of the release of any official economic data.

For the same reason, share prices also capture the subsequent recovery, which is why markets are recently rebounded.

Huge stimulus packages

The main catalyst for the rebound was the huge stimulus package that central banks and governments unleashed. This has eased fears of a credit crisis and supported asset prices.

It is also worth highlighting that the stock market is a poor representation of the economy. For example, the largest US technology companies account for 20% of the total US stock market value, even though their revenues amount to only 4% of US GDP. This has also widened the disconnect between markets and the economy.

Looking ahead though, investors shouldn’t rule out the possibility of a further market correction especially if the economy remains shut for longer than expected, or worse if a second wave of infections occurs.


Important Information
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material, including the website, has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.