Trading the news? Why India GDP growth rate is lagging stock market?

By Waves Strategy Advisors, For more details on various research visit www.wavesstrategy.com

The following excerpt is picked up from “The Financial Waves” monthly update that shows 14 different charts in order to explain the movement from domestic markets including Sensex, Reliance Industries, Banks, BSE Smallcap index and everyone is pointing towards one direction.

Later we have shown analysis on India GDP growth and world markets like DJIA along with Gold in 6 different currencies. This 20 page report is comprehensive and measures the trend of each of the above asset class.

Why we always say that Macro Economic data is a lagging indicator and stocks markets are leading?

Figure 8: India GDP annual growth rate vs. Sensex

Equity markets are constantly discounting the future whereas the Economic data like GDP, PMI numbers, inflation data, IIP are all lagging indicators. These data show what has happened in the economy over the past whereas stock market is constantly thriving and discounting what is expected in future.

Following are the very recent news:

“The classic example is recent Quarterly GDP numbers announced last Friday which was even below the mean expected levels. The Indian economy grew at its slowest pace in four years at 4.4% in the first quarter (Q1, or April-June) of the current fiscal year 2013-14, compared with 4.8% during the preceding quarter (January-March) of the last fiscal, belying hopes of the economy having bottomed out.

The latest PMI reading comes close on the heels of the bleak official figure on Friday that showed that the country's economic growth in the April-June quarter has slid to 4.4 per cent, the lowest in past several years.”

However, Indian equity market had a Gap up opening on Monday’s trading session and continued the uptrend throughout the day finally closing higher by almost 1.5%.

Figure 8 shows India annual GDP growth rate vs. Sensex. We can clearly see that ……. detailed explanation of the above chart is given in the published report.

There is a causality displacement in thinking of many who keeps thinking why did stock market rallied even if the data has been below expectations. The newswire and media also interprets the data with incorrect causal effect.

A negative close on Sensex would have resulted in the following headlines in leading newspaper: “Indian economy still in troubled waters and markets reacted lower on poor GDP and PMI data.”

However, as markets closed positive the headlines in tomorrow’s paper should read something like this “Markets are already discounting the worse” or “Easing geopolitical worries helped market close positive”

In short, we expect the worse of macro Economic data during the formation of a major bottom that will start the multi-year of bull market. Also it will be a surprise if not shock to many of the people who use economic data for future forecasting of stock markets!!!

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Useful for: Trading news, GDP forecast chart, What is India GDP growth rate?

Related to: Sensex, News, PMI, GDP, India GDP growth rate, Quarterly GDP numbers, IIP