Snapshot

Video: Why do markets rise when economies slump?

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

Forward looking

Markets are forward-looking. A share price captures all future earnings of a company. Any news that impacts those earnings expectations can move markets before it actually shows up in financial statements. This is exactly what has happened.

Most of the bad news was already priced in 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 we have seen markets rebound recently.

Huge stimulus packages

The 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 contribute 20% to the total US stock market value, even though their revenues are only 4% of US GDP. This has also widened the disconnect between markets and the economy.

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

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.