Question

Does the stock market reacts quicker or slower than the actual economy? If so, why?

Answer 1

In general it has been observed that the stock markets react much quickly than actual economy. There are many reasons behind this behaviour observed in the stocks markets across the world.

Market sentiment plays a major role in the movement of stock markets. With different technical tools, and other multitudes of data available, analysts and stock brokers predict the movement of the market and many times that impacts how markets react. If the market sentiment is low, even if the growth is reviving and all other data is positive, market still may go down.

Likewise even if the fundamentals of a company are on the downside, if the market sentiment is high, the stock prices may go above.

Despite above mentioned behavioural flaws, stock markets are said to be mirror of the real economy in the medium and long run.