The Blip Conundrum — the reality behind the stock market rally
Since the dawn of a new normal, copious communities have adapted to revive and be reliant on unseen situations. Communities amongst us have induced faith to the foreseeable future and its few baby steps have shown consumer and industrial confidence around the world. Indistinguishably, the wall streets of the best world are turning to be attractive money churners for any average person.
So why is this happening even during a time of uncertainty and are we looking at the next untold crisis in this century?
The law of demand and supply has always been the principle towards the production and consumption of goods and services. It was seen that the average of these two laws had drastically succumbed during the period beginning February through April leading to new lows in the market economy of the very developed nations. A correlative approach was also seen in the stock exchanges around, with the biggest stock indexes failing to meet its investor expectations. It is to be undeniably agreed that every cause is defined by definite and measurable effects, the effect being the economic recession that we know from the past.
But what led to the next was amazing, in fact stimulating. The nation-wide lockdowns started to ease as the ministries believed in the greater good of the economy, which discovered a shift in the overall sentiment of market investors. The very known stock indexes in Asia, Europe, and the Americas start reaching record highs from early April. It raised the ingenuity and confidence among investors as the governments of the strongest and limited economies shoot an influx of cash to the central banks through reducing interest rates and increasing borrowings for the deprived businesses. Frail economies like Venezuela and Lebanon reached out to IMF to support their ever-weakening wealth amidst the crisis. Despite the record numbers in unemployment majorly in the manufacturing industries and growing border tensions, the investor sentiment did not seem to unfalter.
In the time of the year when most of the companies furnished their quarterly corporate earnings performance reports, the results were badly off, keeping SME business up float using their last monetary resource. Even as this created a momentary turmoil in the stock markets, the average turnout was conspicuously stark.
It is clear that the bleak economic data is no match for the rising stock market levels. S&P 500 is the largest stock index that measures 500 large companies in the United States witnessed a rise and steady growth by mid-April. The index displayed the highest on the 8th of June by reaching levels of 3,232 from its depressing lows of 2,200 in March.
India’s highly followed index, Sensex had its fair share of ups and downs as the country went to a complete lockdown for three consecutive months. Unlike the United States were most parts of the country were not under a shutdown, India had to stop their operations leaving many stranded and jobless for the time.
These statistics easily determine that the stock market is hinged upon investor sentiments; that is built on unsure promises from elected representatives of different countries.
Now, why would a profound set of individuals that have experienced the last infamous crisis of 2008 go around it doing the same? Why would they rig the stock market knowingly avoiding the fundamentals of a share or company and invest? When it is wise to hold liquid cash rather than creating a speculative uproar.
Short term gains are attractive to anyone who wishes to make quick money. From the distressing lows of March, investors have started to pursue the stock markets again as their favorite company stocks have noted new lows in the market. This is also leading to an increase in the total number of knowingly elusive retail investors through online investment platforms. The weak economy has given rise to new online stock brokers who can help an individual trade using a mobile device from anywhere. Increased demand in online trading has enticed individuals to spend their now allowed abundant free time in trying out their best bet in trading stocks. The demand in the trade as we see is at a steady advance and anyone would consider this as an opportunity to make quick money. What lurks behind this opportunity is the next bubble that the world could encounter. A devastating and non-predictive impact lies behind this buy-low pattern.
Robinhood is a leading online trade platform with large communities of online traders. It had reported an incident that was published by Bloomberg (Robinhood Market Made Bursting Bubbles Wall Street’s Obsession) on the 13th of June. It mentioned ‘Tuesday afternoon, a smallish Chinese real-estate firm, ticker symbol DUO, went crazy on the Nasdaq. Out of the blue, in a vacuum of news, depositary receipts of the Shenzhen-based outfit shot up 13-fold, taking its market capitalization to $4 billion. Nobody had a definitive reason why. But people could guess. Its name: Fangdd Network Group Ltd., sounds like the acronym for that amalgamation of American megacaps, the “Faangs,” comprising Facebook Inc. and others. Those shares were rallying, and it was easy to believe people had gotten it into their heads that Fangdd could somehow move along with them’.
This is exactly the devastation that needs to be cautiously considered during these desperate times. A false and provocative approach towards stock markets can lead to lasting economic turmoil for any country. It is significant that we understand the proactive decisions made by federal and central banks are to stabilize the economy, labor market, and the impending inflation which do not directly prompt the movement of asset prices.
Higher stock market inflation levels are unveiled in the wake of a depression or recession and are unpreventable by the true nature of it. Such high rates can be diminished through the understanding of core principles and fundamentals of a corporation with its comparison on the present economic scenario. The concept of value investing has been consistently spoken about back in the day and now, its objective to not follow the herd and look upon the long-term company fundamentals has proven to be worthy. An Intelligent Investor (intellectualized by Benjamin Graham) would always consider the three factors while making investment decisions. The factors being the real growth (rise of companies’ earnings and dividends), inflationary growth (general rise of prices throughout the economy) and speculative growth (increase or decrease in the investor public’s appetite for stocks)
As the uncertainty in the global economy rises with the pandemic, it can be inevitably said that every global market is interwoven into a single entity that can make or break irrespective of every economy being pivotal in contributing to that strong or weak entity.