Why Stock market is surging when the Economy (GDP) is going down ? (Finacial Economics)

■ Stock market and the Economy

Everyone must be acquinted about the NEPSE's rise these days. How it's possible ?

Our economy has been recovering and the stock prices are bullish.

Let's go few months back. World's largest economy the U.S's indexes even rose at that time of the pandemic when the GDP, literally had a negative growth. Why is this so ? 

♢ Reasons and Explanations

Illustrative domain: Many economists and financial analysts cite this example, say, a guy is walking through the woods with his dog attached by a lace. The lace is about 1m longer. 

So, the dog moves here and around but under the radial domain of that lace. It barks at people, pee's at poles or tyres, sniff checks people near to it and all. So here, sometimes the dog might be ahead to the owner and sometimes it remains at the back barking at some cats.

Coming to the pivot, here, the dog's movement is the how stock market is moving and the owner, who is holding the lace is the Economy (GDP) and his movement is unto a non staggering path if we compare to that of dog's one.

♢ Why in reality ? 

When the pandemic hit many countries, the economy was shut down. Many of them were locked and the GDP fell sharply.

But here, people are having the (Ratex) Rational expectations (Neo classical conceptual domain) and are forward looking thought that after pandemic there would be a new day and a new insight in the stock market. So their investment rose.

Another reason is, this is in case of our country Nepal, many people have opned DMAT A/C for dematerializing their paper shares to an electronic form so that the investment/trading could be easier. So this increased number of potent participants in stock market as well. This also made the investors an traders a forward looking perpective holders. 

So the big question to all the investors/traders, is stock market index rise means that the economy is booming ? Not everytime. 

We will discuss in upcoming blogs about why Minsky (Instability Hypothesis) explained stock market as a Capitalistic domain.

We will learn more on blogs on Technical Analysis of Share Trading on upcoming blogs as well.

To be contd...

Thank You

Aditya Pokhrel 

MBA, MA Economics, MPA