Do stock markets care about GDP? Maybe, but not in the way you might expect

 
Jasper Lawler
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How do the stock markets react to economic growth figures? Not in the way you might expect
How do the stock markets react to economic growth figures? Not in the way you might expect (Source: Getty)

Looking across the western world, from the United Kingdom to the United States to the Eurozone, it is clear that domestic growth data has minimal immediate impact on stock markets.

This morning, Eurozone GDP quite impressively beat expectations, but 10 minutes later, the Euro Stoxx 50 was lower.

Within half an hour of the slowdown in UK growth being reported on Wednesday, the FTSE 100 had hardly budged, down just five points - less than 0.1 per cent. The FTSE 100 has a lot of multinational companies so less reliance on UK growth makes this understandable.

After US growth was reported as being slower than expected, the S&P 500 was 15 points higher - this is less intuitive.

There may be two issues affecting stock market reaction to GDP data.

Central banks

The two major implications of growth figures for stock markets in the current environment are diametrically opposed; namely the implications for central bank stimulus and the growth prospects for corporations.

Weaker growth keeps central bank’s pedal to the metal on low interest rates, enabling cheap borrowing which can be used for stock buybacks and dividends.

But slow economic growth is a difficult environment for overall corporate profits to grow.

Global perspectives

Global growth matters most and China contributes the most to global growth. Stock markets plunged at the start of the year over fears that China’s currency woes was a signal of a hard landing for China’s economy - with dire consequences for global growth.

Since Chinese bureaucrats switched focus from structural reform to new fiscal stimulus in mid-February, stock markets have skyrocketed.

Clearly economic growth matters for stock markets, but perhaps not in the direct manner it once did.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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