(The theory that has been doing rounds during the heydays of a pandemic that the stock market has decoupled from the broader economy has now fallen flat in the face of its protagonists as runaway inflation, the biggest elephant in the room, and the subsequent policy response by major central banks and Governments is spooking the investor sentiments bringing the gravity-defying rise of stock benchmarks to the real-world realities of earth.)

 

To say that Karl Marx is once again right in his hypothesis that it is the base that determines superstructure may ring like a cliché for many who do not believe in history and its repeat as a tragedy and farce in that order. However, since facts cannot be disputed the tidings in recent history have once again proved the German philosopher and political scientist was right in his views on the economy and how its functions.

 

For the sake of context, the decoupling theory gained currency during the heights of the Covid- 19 pandemic when stupendous gains in stock markets coincided with a rapid fall in almost all other sectors of the economy after the world was forced to shut down to contain the rapid spread of the deadly virus. There are no two opinions that the virus brought almost all the economies to their knees as it wreaked havoc on the lives and livelihoods of the people irrespective of their class or social status.

 

 

An estimate by the United Nations shows that the world economy lost output worth approximately $8.5 trillion, which is almost twice the size of the value of the GDP of India and Great Britain put together. On the other hand, after recovering from the initial shock, major stock market gauges such as Dow, S&P, and the tech-heavy Nasdaq have almost doubled in their values through the pandemic days with key Indian indices following in toe. For starters, between April 2020 and March 2022, India’s benchmark 30-share BSE Sensex rose from a record low of 27,000 points to the 58,000-point mark which translates into a gain of almost 115%. This is despite the domestic economy contracting at a never ever heard rate of 6.61% in fiscal 2020-21.

 

Further, the market capitalization (or the notional value of all stocks traded on a particular trading platform at a given point in time) of major stock markets including India zoomed past the total size of their respective broader economies leading cynics among economists to dub the episode as `tail wagging the head’ situation. Data shows that India's market capitalization to GDP ratio hits a 13-year high of 122% in December 2021.

 

Market, as the self-styled pundits say now remains tuned to the real-time data releases from major Government agencies to take the cue. To say the least major stock indices now dance to the tunes of hard economic numbers without much time lag.

 

All these numbers have had the decoupling protagonists on cloud nine with more daring among them turning oracles overnight to put colorful numbers to expected stock market gains in days, weeks, months, and even years. Going by their narrative, markets have developed their own legs, if not wings, that can only sprint, if not fly, from there on. Indeed, the gullible among us have fallen for these colorful but stretched imaginations which gained grounds in fashion. But a fact that these self-proclaimed pundits conveniently chose to ignore was that the pandemic stock rally was essentially a function of ultra-loose money policy by major central banks who opened the floodgates of ultra-cheap liquidity into the system that was bound to dry up once the pandemic hit economies returns, to use a fashionable phrase, the new normal, The new normal for the global economy was red hot inflation that is refusing die down till now forcing major central banks to reverse their policy course to ultra-hawkish. The unbridled rise in general price levels stoking a cost-of-living crisis across major economies see the textbook version of monetary theory in full play with central banks front-loading jumbo-sized rate hikes and draining excess liquidity from the system.

 

The results now are there for everyone to see and reflect on. The harsh realities of the real-life economy brought the so-called dream run in the stock market to an end. Market, as the self-styled pundits say now remains tuned to the real-time data releases from major Government agencies to take the cue. To say the least major stock indices now dance to the tunes of hard economic numbers without much time lag. In other words, now markets catch a cold if the economy sneezes.

 

 

In lieu of a conclusion, the theory that has been doing rounds during the heydays of the pandemic that the stock market has decoupled from the broader economy has now fallen flat in the face of its protagonists as runaway inflation, the biggest elephant in the room that Is casting its long shadow over economic growth, and the subsequent policy response by major central banks and Governments is spooking the investor sentiments bringing the gravity-defying stock benchmarks to the earth. Non-believers in Marx’s acumen and wisdom may find solace in Sir Isaac Newton‘s theory that “what goes up must come down. Or simply put, it is economy in command, STUPID!!!