A slowing economy and a thriving stock market usually can’t go together. One of the two needs to change. The economy has to gain momentum quickly or the stock market has to correct its momentum directionally. This is very normal and expected.
But, we have gone way beyond normal. We believe that our need to invest will always keep the markets buoyant. This is a consumerist world view and not an investor perspective.
Yet, we are seeing this narrative being peddled successfully in our stock market. The size of the IPO book, the number of investors who are on the platforms, the demat account count that keeps soaring regularly, and the domestic flows are seen as market stability tools. This perspective completely views domestic monies purely as an instrument for maintaining market stability. But, the investor who is giving this money hardly sees it so. He sees his capital seeking growth in value and showing stability in investment performance. He has been promised both by the asset management companies and is hardly prepared for significant drawdowns or prolonged phases of underperformance.
But, a slowing economy will need a market reset. The macros must enable return to growth, and policy making must enable macros to fuel growth. These changes are likely to take time to play out. The market will need to calibrate itself so that it is reasonably in sync with the long term trajectory of the economy.
While it can take time to do so and may hold out for the return of better data, it cannot endlessly remain disconnected to the economic trajectory. Liquidity as an enabler of market stability also has its own restrictions and we are likely to see macro economic factors weigh on the stock market. As the year draws to a close, we are going to see things play out differently from how they did so far in 2024.