Does GDP data indicate market movements?

Last week the markets took much succour from the announcement of the third quarter GDP numbers. The rally came after the Indian economy grew 8.4% in the October-December quarter, the fastest pace in six quarters, according to data released on Thursday.

However, gross value added (GVA), which is a measure of the total value of goods and services produced in the economy and excludes indirect taxes and subsidies, grew 6.5%, prompting economists to say that GDP data overstated growth trends. The wide divergence between the GVA and GDP in the October-December quarter was mainly due to a sharp fall in subsidies in that quarter largely because of lower payouts on fertiliser subsidies like Urea.

This leads us to believe that general euphoria based on macro events should be taken with a pinch of salt. In any case the GDP numbers are a lagging indicator and a lagging indicator cannot or should not influence a leading indicator like the stock market. Also macro data can be susceptible to variations of a technical kind as seen in the most recent quarter. Hence a stronger than expected GDP growth number leading to market strength makes for a good headline, but only for the lay investor.

In the long run earnings growth and the sustainability of the same indicate the direction of the markets. While much also has been made about the magnificent 7 in the US leading the markets there, it is based of robust earnings growth seen in them.