Decoupling of stock markets and purchasing manager data: causes and effects

Decoupling of stock markets and purchasing manager data: causes and effects

According to a report by finanzmarktwelt.de, the stock markets have decoupled from economic development. Despite interest rates rising massively, the European Stoxx 600 index and the Euro Stoxx 50 rose by 8.22% and 12.19%, respectively, in the last twelve months. Since summer 2021, the two indices have risen by 3.75% and 7.6% to date. This shows that the stock markets are decoupled from economic development, as the development of the Purchasing Managers' Index (PMI) makes clear.

The decoupling between equity markets and the PMI is clearly visible as equity markets continue to rise while purchasing manager data deteriorates. The Eurozone PMI fell from 54 to 47 points since May 2023, indicating a contraction in the economy. The situation is similar at the global level, where the MSCI World Index has risen while the global PMI has decoupled downwards.

The question that arises is whether economic expectations will recover or whether stock prices will adjust downwards. The big criticism is that stock prices have risen too much, even though a recession could be imminent in Europe and possibly the US. This creates a wide gap between stocks and PMI data that may not be sustainable.

Overall, the development of the stock markets shows a clear decoupling from real economic development, which at first glance appears to be an irrational development. It remains to be seen whether the stock markets will adapt to the changed economic development or whether the purchasing manager data will improve again in order to reduce the gap that has arisen. This decoupling could have an impact on the market and the financial industry in the future, as investors may be overly optimistic and underestimate the economic risks.