The growing disconnect between robust stock markets and the real global economy

Most economies are witnessing their worst-ever decline in performance, as evidenced by increasing unemployment, decreasing consumer spending, shrinking GDP, and an uncertain business outlook. On the other hand, the world’s largest equity indices, for example, the S&P 500, MSCI, and Euro Stoxx 50, have increased by almost 60% since their temporary crash in March 2020. The S&P 500 index lost a third of its value from 19 February 2020 to 23 March 2020, but has recovered more than half of its losses since then without a break. The world has probably never seen such a divergence between markets and economies as now.

This paper highlights the fundamental principles on which stock markets and the real global economy work and the factors contributing to the growing disconnect between the two.

Key Takeaways

• The major central banks are injecting trillions of dollars into their respective financial
  systems through asset purchases and stimulus packages to ensure market optimism.
• Abundant liquidity across the globe has led investors to look for investments promising
  higher returns, and with low interest rates on savings accounts, most of the money is making its way
  into capital markets.
• The Fed’s monetary policies have increased speculative activity in the stock market; this could cause
  asset bubbles, making investors invest heavily without differentiating between a good
  borrower and a bad one.
• Flooding economies with cash would enhance growth forecasts but pose the risk of rising inflation

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