The Economy is Going to the Dogs! Why Is the Stock Market Going Up?

The great mystery. What is it with the Equity Markets?

Why is it going up?

India is under the strictest possible lockdown from the last 38 days.

There is no economic activity. The biggest of big corporate in India, Reliance Industries Limited has announced a pay cut. Soon others will follow suit as there has been not a single rupee of revenue whereas all the fixed costs have to be borne.

Moody’s slashed India’s growth to 0.2% for the year 2020.

CRISIL has released a 42-page report estimating the Indian growth at 0.5%. Which is as good as Zero. What does it matter?. The experts are projecting some estimates making some assumption that is fine.

It doesn’t require too much intelligence to know that the devastation in certain sectors like Travel, Arline, Entertainment, Luxury Goods, Restaurants, Event management where days lost can never be recouped will be total.

For most of the business owners, this year is meant to be survived. Hour by hour. Day by Day. There may be a handful of companies like makers of sanitisers, Pharma companies, Online web services who may turn in a blockbuster year but overall it is going to be a washout.

Owning stock of a company is owning the rights to the current and future profits of the company. That is where the confusion arises.

A cure or a vaccine is still not found.

We don’t know how long this pandemic will last. Most certainly, there will be losses announced by companies one after another but the market is in the green.

WHY IS THE STOCK MARKET GOING UP?

Indian benchmark indices closed@

                               Sensex                   Nifty

1st Jan 2020         41306                    12182

23 Mar 2020         25981                    7610   Fell by 37%,

29 April 2020        32720                    9553   Recovered 25% from the lows.

What is going on?

Is the Stock Market Nuts?

In some way yes.

I have read and learned from the experts and have experienced that Stock Market performance is sometimes disconnected from the real economy.

That is because the stock market investors are very quick and work with probabilities.

The keyword here is the expectation. Stock prices go up and down based on expectations. If the performance of a company is expected to be good then the investors pay for it beforehand.

If the performance of that company comes as expected. Okay. No great shakes. But if it betters expectation, then boom. Price can rocket.

Similarly, the price can fall if the performance of a company or broadly many companies do not live up to expectations. A company can deliver stellar results and yet see its price fall.

It could be because the price had already run up in expectation of the performance and now investors are booking the profit. Or they do not expect the performance to continue.

Similarly, with the Pandemic, stock prices crashed as stock investors could not fathom this kind of a world closure. As the virus spread, deaths increased, businesses shut down the reaction was to sell, sell, and sell. The near term expectations have gone awry.

All the incoming data of cures, vaccines trial, and the winners and the losers of the pandemic is analysed by all the millions of participants.

It appears that they have concluded that the virus will be controlled probably in a couple of months. The Government is laying out a lot of stimuli so, 2021 may see a good recovery.

They start buying stocks to participate in future profits.

Make no mistake, there will be lots of ups and downs as information and data will keep flowing in. On a given day market may go ballistic if a cure is found or a vaccine developed and approved by the FDA. Next day news may pour in that it was a false hope. Down goes the market.

Instant testing kits may be developed which may make flying safe again. Boom, Airline stock will zoom.

There is a lot of drama left.

China may be isolated by the world. Or it may not, they may flex their muscles and get away with it.

Right now the prices show that performance may not be as bad as was expected. Hence a rally. If the performance is much worse, it will be proven that the investors overpaid earlier and the market will fall.

The stock market is like a visit to an amusement park. Right now we are on the most dangerous scariest roller coaster ride up and down based on expectation and reality.

Will it end in a big drop? Or on a stable smooth high after a drop?

Time will tell.