The disconnect between economy and stock markets

April 2020 is one of the weakest months for the world economy and one of the best month for stock markets worldwide. Lack of correlation between the condition of world economy and flourishing stock markets create misunderstanding among general public. But this disconnecting is well understood by experienced investors. We should not forget that markets are simply reflecting the mood of money owners.

Generally stock market represent an attempt to value all of a company’s earnings from present moment and into the future. Economy represent what’s going on right now: jobs, jobless claims, jobless rate, average income per capita, hourly wages, items affordability etc. So, approach to economy and stock markets are fundamentally different. The difference in timeframe between economy and stock market is crucial.

Before 2008 economic crisis, stock markets started falling 4 months before the crisis and reached bottom 3 months before crisis ended. In April 2020 the situation is different: no prolonged market fall, no recession, citizens can’t wait to go back to work. The crucial lesson from 2008 financial crisis learn by the Federal Reserve and European Central Bank. In 2020 both banks could buy about $6 trillion worth of securities. The outcome will depend on duration of covid-19 worldwide and economic stimulus packages used.

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