Does GDP Affect Stock Market?

A country’s GDP measures both its economic growth and its residents’ purchasing power. As a result, the growth of India’s GDP will affect the success of your investment portfolio. We’ll learn what GDP is, how it’s calculated, and how a change in GDP affects your financial portfolio in this post. Let’s start with the fundamentals.

What is GDP?

A country’s GDP, or Gross Domestic Product, is the total value of products and services generated over a given time period. GDP statistics is calculated in India for each financial year, which runs from April 1 to March 31. The information is published on a quarterly and annual basis.

GDP statistics is a measure of a country’s economic health. A high rate of GDP growth suggests that the economy is growing and doing well. A negative GDP growth rate, on the other hand, implies that the economy has contracted and is not in good shape.

To address the expanding needs of the enormous population in a developing economy like India, a high GDP growth rate is essential. We can do so by investing heavily in infrastructure such as roads, railways, healthcare, and education, among other things.

How is GDP calculated in India?

The National Accounts Division (NAD), which is part of the Central Statistical Office in India, compiles and prepares GDP data (CSO). The GDP statistics is released by the CSO, which is part of the Ministry of Statistics and Program Implementation (MoSPI).

Expenditure method

The expenditure-based method shows how the Indian economy’s various sectors are performing.

  • The amount spent by households on goods and services is referred to as private consumption.
  • The term “gross investment” refers to the amount of money spent on capital goods by the private sector.
  • Government spending refers to how much money the government spends on things like paying employees’ salaries, pensions, subsidies, and running social programs, among other things.

Value Addition Method

India also uses the Gross Value Addition (GVA) Method or Value Addition Method to calculate GDP. As it goes through the supply chain, each sector of the economy adds value. The GVA approach calculates GDP by taking into consideration the following eight sectors:

The nominal GDP is calculated first when computing GDP. After that, it’s corrected for inflation, and the real GDP is calculated.

India’s GDP in the last few quarters

India’s quarterly GDP data for the last three years is depicted in the figure above. Positive increase was seen in the first quarter of 2020. Following that, COVID-19 struck, resulting in two quarters of negative growth. The Indian economy recovered from the pandemic’s effects in the fourth quarter of 2020, growing at a rate of 1.6 percent.

India’s GDP growth over the last decade

From 2012 to 2016, India’s GDP grew at a faster rate every year, as shown in the graph above. However, beginning in 2017, growth began to decline until 2019. COVID-19’s impact at the start of 2020 exacerbated the situation.

How a change in GDP affects your investment portfolio

Stock markets are directly associated with a country’s GDP, according to the general rule. India is no different. Because markets and GDP are intimately interrelated, your investment portfolio is also directly correlated with GDP.

  • The stock markets will be energized by a positive shift in the GDP (a higher GDP growth number), and the market will rise as a result. If the stock market rises, it will have a beneficial impact on your investment portfolio.
  • A negative change in the GDP (a lower GDP growth statistic or a GDP contraction) will undoubtedly cause the financial markets to react negatively. As a result, the stock market will fall. If the stock market falls, it will have a negative influence on your investment portfolio.

There is a positive association between India’s GDP growth and the NIFTY 50 Index, as shown in the graph above:

  • India’s GDP expanded at an annual pace of roughly 8% from 2004 to 2008. During this time, the NIFTY 50 Index climbed from 2000 to 4000 points. During this time, your investment portfolio should have done well.
  • The subprime mortgage crisis hit the United States in 2008-2009, with global ramifications. During this time, India’s GDP growth slowed from 8% to roughly 3%, and the NIFTY 50 Index dropped from highs of 4000 to lows of 3000. During this time, it would have had a detrimental influence on your financial portfolio.
  • Between 2009 and 2011, the GDP recovered, and the NIFTY 50 Index did as well. Your financial portfolio would have rebounded as well.
  • GDP growth slowed between 2011 and 2013, owing to reasons such as high crude oil prices, high inflation, and the European debt crisis, among others. During this time, the NIFTY 50 Index also saw a correction. Your investment portfolio would have suffered as well.
  • The GDP increased significantly from 2013 to 2018, surpassing 8% for the second time. During this time, the NIFTY 50 Index performed admirably. During this time, your investment portfolio would have produced impressive gains.
  • In recent years, the direct association between GDP growth and the NIFTY 50 Index appears to have weakened. In truth, there is a significant gap between the two. So, despite the fact that GDP growth has slowed, your investment portfolio has produced excellent results.

Divergence between GDP growth and stock markets

The relationship between GDP growth and stock markets is usually direct, as shown in the graph above, but this is not always the case. The Nifty 50 Index and GDP growth headed in different directions in 2019, and this trend persisted in 2020 and 2021. The following things may contribute to such a scenario:

Stock markets that are always looking ahead: Stock markets are always looking ahead. So, even if GDP growth is currently modest, the stock markets are anticipating strong GDP growth in the future and are trading at higher levels as a result.

High liquidity: In the previous year and a half, central banks and governments around the world, including India, have implemented various stimulus initiatives to mitigate the impact of COVID-19. People have received cash as a result of this. The majority of this money has been placed in the stock markets, which has resulted in greater stock market trading levels.

Other than stock, there aren’t many investing options: To counteract the pandemic’s effects and jump-start the economy, the RBI slashed interest rates dramatically. As a result, banks’ fixed deposit rates have dropped to multi-year lows. When the pandemic hit, gold spiked, but it has since adjusted and remained static. As a result, except from stock, Indian individual investors have few other investing options. As a result, most investors have put their money into stocks, causing the NIFTY 50 Index to rise.

Foreign fund flows: In the recent year, foreign institutional investors (FIIs) have invested massive sums of money in Indian stock markets, in addition to Indian ordinary investors. The NIFTY 50 Index has also risen as a result of this.

Better company profitability: The pandemic has impacted the whole Indian corporate sector. The unlisted economy, SMEs, MSMEs, and the informal economy continue to suffer. Large publicly traded corporations, on the other hand, have been able to weather the storm much more quickly and effectively. As a result, huge publicly traded firms’ profits have increased, and their stock values have increased, causing the NIFTY 50 Index to rise.

Divergence between GDP growth and stock markets is temporary

We’ve seen how the GDP growth rate and stock market performance can diverge. This type of divergence, however, is just transitory and will be corrected at some point. Either the GDP growth rate will rebound and the Indian economy will return to its previous high growth rate, or the stock market will correct in tandem with the low GDP growth rate in the future.

India’s GDP growth rate has a better chance of increasing than the stock market falling. Still, only time will tell what will transpire. What appears likely is that, over time, the pace of GDP growth and the stock market will re-establish a direct relationship.

Last words

You would be getting strong returns on your investment portfolio right now, even if GDP growth is sluggish. However, this may not last long, therefore let’s hope India’s GDP growth picks up rapidly so that our current investment returns remain stable and grow in the future. In the long run, proper asset allocation will ensure that your investment portfolio earns the best possible returns, even if GDP growth is sluggish. When the equity markets are performing poorly, the debt and gold sections of your investing portfolio can provide good returns. As a result, ensure that you have a suitable asset allocation between equity, gold, debt, and other assets, so that you can continue to achieve optimal returns regardless of GDP growth.

Is the stock market associated with GDP?

  • The stock market is frequently used as a sentiment indicator, and it can have a positive or negative impact on GDP.
  • In a bull market, when stock values rise, individuals and businesses have more money and confidence, which leads to increased spending and GDP growth.
  • Consumers and businesses have less wealth and optimism in a bear market, which leads to less spending and lower GDP.

Is there a link between GDP and stock market performance?

The average “slippage” between actual GDP and EPS growth is 2.3 percent, according to our findings. Stock prices have tracked GDP more closely on average, with a mean divergence of of 0.3 percent. This is due to a significant increase (2.0 percent) in the PE ratio during the same time period, which negated the earnings dilution effect.

What percentage of GDP is invested in the stock market?

Stock market capitalization as a percentage of GDP in the United States, 1975-2020: We have data for the United States from 1975 through 2020 for this indicator. During that time, the average figure for the United States was 96.85 percent, with a low of 36.65 percent in 1978 and a high of 194.34 percent in 2020.

What is meant by the word “investment?

What exactly do economists mean when they talk about investment or company spending? The purchase of stocks and bonds, as well as the trading of financial assets, are not included in the calculation of GDP. It refers to the purchase of new capital goods, such as commercial real estate (such as buildings, factories, and stores), equipment, and inventory. Even if they have not yet sold, inventories produced this year are included in this year’s GDP. It’s like if the company invested in its own inventories, according to the accountant. According to the Bureau of Economic Analysis, business investment totaled more than $2 trillion in 2012.

In 2012, Table 5.1 shows how these four components contributed to the GDP. Figure 5.4 (a) depicts the percentages of GDP spent on consumption, investment, and government purchases across time, whereas Figure 5.4 (b) depicts the percentages of GDP spent on exports and imports over time. There are a few trends worth noting concerning each of these components. The components of GDP from the demand side are shown in Table 5.1. The percentages are depicted in Figure 5.3.

What effect does GDP have on prices?

Gross domestic product (GDP) is the total monetary value, or market value, of finished products and services produced inside a country over a given time period, usually a year or quarter. It’s a measure of domestic production in this sense, and it can be used to assess a country’s economic health.

Nominal GDP vs. Real GDP

Depending on how it’s computed, GDP is usually expressed in two ways: nominal GDP and real GDP.

Nominal GDP analyzes broad changes in an economy’s value over time by accounting for current market prices without taking deflation or inflation into consideration. Real GDP takes into account inflation and the overall growth in price levels, making it a more accurate measure of a country’s economic health.

Because it provides more value and insight, this paper will primarily focus on real GDP.

What indicator rises when GDP falls?

GDP does not tell us anything about the state of the economy on its own. Change in GDP, on the other hand, does. The economy is growing if GDP (adjusted for inflation) increases. If it falls, the economy is shrinking.

High Employment

People must spend money on goods and services to keep the economy afloat. Reduced personal spending on food, clothing, appliances, autos, housing, and medical care could slash GDP and hurt the economy significantly. Because the majority of individuals earn their spending money by working, making jobs available to everyone who wants one is an important goal for all economies. On the whole,

Why does the stock market outperform the economy?

Stock returns follow economic growth in certain ways, but they also have a life of their own, fueled by greed, fear, optimism, and emotions. Stock returns fluctuate more than the economy because of these emotions, which is one of the main reasons why equities are more volatile than economic development.

Is the market capitalization higher than the GDP?

Trends in the initial public offering (IPO) market, as well as the fraction of companies that are publicly listed vs those that are private, have an impact on this market cap to GDP ratio. If all else is equal, a big rise in the fraction of companies that are public vs. private will raise the market cap to GDP ratio, even if nothing else has changed in terms of valuation.

What is Warren Buffett’s investment ratio?

The Buffett Indicator is the ratio of the entire value of the US stock market to GDP. The ratio was named after Warren Buffett, who described it as “the finest single gauge of where valuations are at any given moment.”

The Wilshire 5000 is the most often used index for calculating the total value of the US stock market. Wilshire provides this data directly (links to all data sources are provided below), with monthly data beginning in 1971 and daily measures beginning in 1980. A one-point gain in the Wilshire index translates to a $1 billion increase in US market capitalization. According to Wilshire, the 1:1 ratio has shifted somewhat, and a 1-point increase in the index amounted to a $1.05 billion increase in 2020. To compensate for this minor drift, we adjust the data back to inception (and projected ahead) on a straight-line basis.