Date
28 March 2017
Japan offers an example of the lack of connection between the economy and the stock market. The Nikkei index surged to a historic high in 1989 when the nation's economy was waning. Photo: Bloomberg
Japan offers an example of the lack of connection between the economy and the stock market. The Nikkei index surged to a historic high in 1989 when the nation's economy was waning. Photo: Bloomberg

Is it really so strange that stocks rally when economy tanks?

Many fail to figure out why, at a time when China’s economic growth rate has plummeted to half of the 2007 peak, the stock market manages to orchestrate such a dazzling carnival.

The traditional thinking is that the capital market goes hand in hand with economic expansion.

But Holger Sandte, chief economist at BNY Mellon, said this is a fallacy. He concludes in a report that the relevance of the US economic growth to the rise and fall of the Standard & Poor’s 500 index is “virtually zero”. Similar historical examples can also be found in Germany and Japan.

The current weakening economy but strengthening stock market situation can be justified this way:

Before any stock market bubble bursts, the consumer sentiment is typically high. That can translate into increased corporate earnings.

The mainland economy can tread a similar path: a sustained bull run and subsequent consumption may put the economy back in the fast lane.

Another explanation is that amid adverse effects elsewhere like overcapacity, equipment underutilization and ghost towns, capital is being pulled out of those non-performing sectors (infrastructure and property, for example) and reallocated to the stock market.

This article appeared in the Hong Kong Economic Journal on April 14.

Translation by Frank Chen

[Chinese version 中文版]

– Contact us at [email protected]

CG

A famous Hong Kong writer; founder of the Hong Kong Economic Journal

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