Is the Stock Market About to Crash?

There you have it.

A personality no lesser then the RBI Governor Shaktikanta Das mentioned in an interview on 21 Aug 2020 that there is a disconnect between “Stock markets and the real economy, not only in India but in global markets. A correction should happen but it is difficult to say when”.

People have been bewildered by the rise in the Stock Markets along with the number of cases affected by the coronavirus.

India currently has a staggering 30 lakh plus cases of the virus and eventually we may become the country with the highest number of reported coronavirus cases.

As per the latest reports, close to 2 Crore salaried people in India have lost their jobs. IMF estimates the GDP of India will shrink this year by 3%. Loss of livelihoods and disruption in business has been staggering.

The Stock Market seems to be oblivious to all this.

After a crash in March, the markets have recovered and are now blazing ahead. Is it completely disconnected from the economic reality or is there something else going on?

Stock prices have to reflect the earnings of the companies whose stock prices are being traded. There is a reason why the Stock market rises or falls ahead of the actual happenings. I had written about it earlier and you can read it here.

Actually,if you notice the last year’s performance of the Sensex & Nifty there has been very little gain. The market is just about at the same level as this time last year.

Markets haven’t risen to astronomical levels as what the perception seems to be. They have recovered from the March lows and certainly, they are not reflecting the current distress and misery in a huge section of the economy.

The corner specialty restaurants, local travel agents, advertising companies, franchise owners, small hotels have seen their business vanish virtually overnight. Their distress is real but they do not form a part of the listed space in the markets.

Multiplexes, Hotel Chains, and Airlines have seen their stock prices decimated.

The losses in those sectors have been offset by expected gains in other companies like Pharmaceuticals and organized players like FMCG.

The stock prices of even the out of favour sectors have seen some recovery. The idea is that as compared to their unorganized peers they will be able to turn around fastest. If cinemas open, lot of people will prefer to go to a PVR multiplex as against the local Gemini theatre.

Why? Not because they don’t want to support the smaller guy, but because they think the bigger cinemas will have the wherewithal to follow the safety and sanitization guidelines.

Self-Preservation!

Post the coronavirus seems that the strong will emerge stronger and the weaker hands will have to cave. It is an unfortunate reality but true.

The markets may be overvalued based on expectation and it may correct if the recovery is not as swift as expected. But that will only be in hindsight.

There may be many other reasons.

1. Speculation – The number of new entrants in the stock market has increased dramatically during the coronavirus times. The stock market is being used as a casino and it has worked so far so why not? It’s providing income and a much-needed thrill in our lives. Also, investors have a problem with where to invest? Bonds and FD’s are giving dismal returns. Gold and the Stock Market where the returns appear to be is where the money is flowing in.

1. Central banks support and its easy monetary policy. All over the world, governments have loosened their purse strings to stop the economy from collapsing. Some of the money has found its way into stocks. Like when you open the flood gates of a dam, you cannot control where the water will flow. The purpose of loose monetary policy is not to prop up the stock market but it did.

1. Optimism for a vaccine and a cure soon. And a complete turnaround and a V shape recovery. A few indicators that there is an upsurge in economic activities like GST collection, good monsoon, higher fertilizer sale, auto sales normalizing. There is a possibility that reforms will be fast-tracked out of desperation. Some of them have already seen the light of the day like disbanding of APMC markets, removal of essential commodities Act.

The truth is that economy is in the doldrums and will remain so till this disease or the fear of it is conquered and life goes on.

The Stock Market is not a full representation of the country. It is representing the organized, smart, nimble businesses who have the financial muscle and the smarts to withstand the coronavirus. The inherent strong immunity of the market is the cause of the rally.

The market can correct anytime for fundamental reasons or technical. The fact that the market is booming despite the fact that the economy is shrinking is counterintuitive but not shocking. It can happen for a short time or even extended periods of time.

No one can predict a market crash. From past movements in the markets, experts look at some signs and caution investors but there is no foolproof formula. Right now as the economy is weak and the market seems strong there is a feeling of an impending crash. But that anomaly can go on for a long time.

Stock prices can overshoot with an expectation of recovery. Whether the stock prices today were unjustified and over-optimistic will be known only in hindsight.

The market is not the economy.

Do not confuse the two.