Decreased productivity and lockdowns have taken a toll on the financials of the corporate sector. Supply chain disruptions, manufacturing hindrances and loss of jobs have adversely impacted the economy at large. Consequent to this, one would expect our stock market to mirror these sentiments.
However actual reality on dalal street is exactly the opposite to what should have been the normal reaction to a slowdown set in even before the pandemic which has only worsened it. As of last Friday’s, closing (August 28th, 2020), Sensex stood at 39,367.31 pts, down just 6% from 41,945.37 pts highest recorded in 2020; Sensex has gained well over 61% from the lowest level of 25,981.24 recorded on black Monday of March 23, 2020; this exceptional performance of stock market continues to remain a mystery to most of us.
Possible Explanations to Stock Market Performance
Pandemic has an end date
Markets are normally forward-looking & analysts are expressing confidence that pandemic would eventually end and vaccine is round the corner. It is very likely that one out of 133 vaccines under various stages of testing would soon find a way to the market, which would boost the market to a new high.
Most of the central banks across the world in a bid to provide a boost to the economy have lowered the interest rates, although stocks sound expensive, but when compared with low-interest rates offered by the banks, yields at stock market are significantly higher.
Massive Monetary Stimulus
Monetary Stimulus announced by the governments have increased the money supply in the economy, some of this money has found its way to the stock market, giving impetus.
Support from winners
Technology has enabled employees of some of the large-cap stocks to work efficiently from home, showing no or minimal impact on actual performance. Their stocks ironically have considerably large weightage while calculating the level of Sensex, hence we see these high levels.
So, the underlying economy continues to remain weak or would take much longer time to recover from the impact of COVID19, we should not be surprised to see continued high levels of the stock market.
Investment or Speculation
Usually, if people feel it is a good time to invest in companies, then the demand for shares is high and the stock market goes up. But it can also be the case that instead of investing long term, people are merely buying and selling shares during the same day, hence finding ways and means to earn money through speculation rather than investing money for a long term. Stock exchanges do publish the percentage of trades executed during the period, where the delivery of shares is actually taken; we have seen the percentage of delivery transactions in last few months to be reasonably lower than the comparable historical data points available; aiding to the belief that its pure speculation that’s currently driving the stock market.
Domestic or Foreign Money
Indian stock market has been one of the best performing stock markets in the world, this even though the domestic financial institutions, domestic mutual funds & domestic investors have been net sellers in past few months; It turns out that there was a large sum of foreign money that came into India’s stock markets in June. Nearly, Rs 22,000 crore of foreign money came into India’s stock markets in June 2020 alone. This was the fourth-highest in the last 5 years. Nature of this foreign investment; long term/ short term/ one time, requires a deeper crunching of data points.
These are probable reasons for exceptionally good stock market performance in last few months, experts are of the view that this rally should continue for some more time. So as of now, market does provide good avenues for making quick money, but one must make prudent decisions supported by own research while investing.