The huge gap between the financial markets and the real economy explained

Erasmus School of Economics

Empty plane seats and high unemployment rates is only part of the situation we are finding ourselves in now. At the same time, the stock markets and prices on the housing market are rising. The gap between the real economy and the financial markets rarely seemed this big. Dutch newspaper De Volkskrant asked Patrick Verwijmeren, Professor of Corporate Finance at Erasmus School of Economics, how economists look at the current situation.

Different views

‘The discrepancy between the real economy and the financial markets is common, but now it is especially strong', says Verwijmeren, who specialises in the stock market and made a name for himself with his research into art investments. According to Verwijmeren, the current differences between the two markets are mainly due to their different views. ‘The real economy looks at production and sales, which is going badly now. But the stock market value is nothing more than profits of the future translated into the present. The real economy is now, the stock market is the view of the future.’

Confidence in the future

The US stock market indices S&P 500 and Nasdaq reached a new record high in August. The Amsterdam AEX has not yet returned to the score which it had at the beginning of February, but was at the same level as one year ago in August. ‘As a result of the government measures, the stock market probably has more confidence in the future,' Verwijmeren explains. ‘As a result of government interventions, companies are making more profit and there is higher consumer confidence. Moreover, investors are already praising the fact that governments will intervene again in future crises.’ But there is another explanation as well. ‘Investors are looking for investments', says Verwijmeren. ‘There are few better alternatives at the moment and savings interest rates are low. This could also contribute to price rises.’

More information

The full article from De Volkskrant, 18 September 2020, can be found here (in Dutch). 

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