MACROECNOMICS AND MARKET SENTIMENT

By

TAMAL DATTA CHAUDHURI

  Principal & Professor, Finance and Economics

By market sentiment we mean stock market sentiment as reflected in the level and movement in the Sensex in India and the Dow Jones Industrial Average in the US. By macroeconomics we mean various government policies, either monetary policies or fiscal policies, aimed at either controlling public expenditure, or taming inflation, or stabilizing the exchange rate, or changing the interest rates, or affecting the supply of money, or creating employment etc. The point that I am trying to make here is that macroeconomic policies get reflected in market sentiment and the mood of an economy about the macroeconomic environment can be gauged by the movement in stock market indices. Stock market indices are just not stock market sentiment barometers; over some period of time, they reflect the macroeconomic environment of the economy. One, however, needs to keep in mind that this observation is not valid on a day to day basis.

Figure 1

 To understand this let us turn to Figure 1. The green zig zag line is the movement in Sensex from 2007 onwards and the blue zig zag line is the Dow Jones Industrial Average (DJIA) over the same period. The trend lines also follow the same colour pattern.

Observe that both the Sensex and the DJIA fell sharply in the first phase from 2008 to 2009. However, due to proactive expansionary policy measures from the government of India, the Sensex recovered faster than the DJIA from 2009 to 2011. The slope of the green line is much steeper than the blue line.

The interesting part is from 2011 onwards. Whereas the Sensex has overall flattened out, the DJIA has maintained its steady upward movement. Actually after 2011, while the government of India withdrew the stimulus package, the US government continued with its low interest rate expansionary policy. Thus the internal macroeconomic environment gets reflected in market sentiment. Short term movements in the Sensex reflect immediate short term reaction to news which could also be macroeconomic in nature, both at home and abroad. A slightly medium to long term trend strengthens the association between macroeconomics and market sentiment.