Ever wondered why an arrow is first pulled backwards before shooting it forward? Just like that arrow, the stock market too, often moves in a direction opposite to the economy, at least in the short term. Yes, it sounds as crazy as a batsman running towards the bowler, but let me explain why.
1. Market Prices Future, Not Present: Imagine a cricket commentator predicting the outcome of the match in the 5th over itself. That’s what the stock market does. It prices in the future economic scenario, not the present. If investors see green shoots of recovery, they start buying in anticipation of future earnings growth, pushing up the market.
2. Sentiment and Perception: In cricket, the crowd’s cheer can lift a team’s morale. Similarly, market sentiment plays a significant role. The market’s mood may improve with positive news, like a potential policy change or vaccine breakthrough, even when the broader economy is struggling.
3. Liquidity Infusion: Sometimes, governments and central banks flood the economy with liquidity to stimulate growth, akin to giving extra power-plays to a batting side. This excess liquidity often finds its way into stock markets, causing them to surge even when the economy is in a downturn.
4. Disproportionate Impact on Sectors: A cricket match may not be won by all players performing equally, it might be a century by one batsman that gets the team over the line. Similarly, some sectors can surge due to the unique conditions of an economic downturn (like IT or pharma during the pandemic), lifting the overall market.
To sum up, the stock market and the economy are like two players of the same cricket team. They may not perform simultaneously, but over the long term, they both contribute to the victory of financial growth. And as the great Warren Buffett has said, “Be fearful when others are greedy and greedy when others are fearful.”
