The stock market follows profit and interest rate expectations more than the GDP of the day. That’s why it can fall before a recession and rise before recovery.
According to euribor.com.es, the price of a share reflects what the market expects the company to earn in the future. That’s why the stock market can fall before a recession and rise before economic recovery.
Investors mainly focus on the expected GDP, expected interest rates, and expected profits. The quarterly growth figure weighs less because the market anticipates what is to come.
Among the factors that investors monitor are corporate profits, inflation, interest rates, employment, and confidence. Geopolitics and fiscal policies also play a role. Profits are the long-term engine, and interest rates set the price of money and affect the valuation of all assets.
Divergences between the stock market and the economy are common. In 2008, the economy collapsed and the stock market fell sharply. In 2020, the stock market recovered before the economy returned to normal, according to the same analysis.
Among the most common mistakes are buying or selling solely based on the quarterly GDP figure, ignoring the effect of interest rates on valuation, and reacting to headlines without checking their impact on profits. It is also often assumed that the stock market and the economy always move in parallel.
To follow the market wisely, it is advisable to look at corporate profits and the cost of money. The Bank of Spain and the International Monetary Fund publish benchmark reports on the economy, and the Bank for International Settlements issues annual reports on the financial system.
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