Bullish Market Bearish Economy: An Intriguing Disconnect
“Sensex breaches 52,000 mark” — a headline that rings to any investor’s glee, but what if I told you, the headline made its way to the frontpage of financial publications in the middle of a pandemic that had absolutely ravaged the global economy?
Ever since the onset of the Coronavirus pandemic in March 2020, the global economic landscape has appeared highly volatile and vulnerable. Rise in unemployment, fall in revenue and huge losses being sustained resulted in grim economic projections for coming quarters. However, the Indian stock market surprisingly rallied shortly after the world’s biggest lockdown, in India, was eased but not entirely lifted. In 2020 itself, Sensex recorded 3 all time high’s- almost as many times as it did in 2019 , when unbeknownst to anyone, optimistic forecasts were made about economic growth in 2020.
The word Sensex is a synthesis of the words Sensitive and Index, coined by analyst Deepak Mohoni and is the benchmark equity index of Bombay Stock Exchange. It comprises the 30 most-widely traded stocks on the exchange and is supposed to be reflective of the Indian economy. So how was it that the economy dragged under the weight of sudden economic downfall while the stock market painted a different picture?
A similar phenomenon was observed in stock markets in the USA and Europe. In an interview with Economic Times, Rakesh Mohan(economist and former deputy governor of RBI) opined on the global disconnect by his understanding based on the liquidity being pumped into the system by central banks, which is what the RBI did as well. A classic rule of Economics straight from the textbook found its way to the stock market indexes. With the RBI and other central banks announcing measures for impacted sectors of the economy, liquidity meant to revive the slumping economy was perceived optimistically.
Italy Goldstein- Wharton finance professor-attributed the disconnect between the stock market and economy to the monetary aid provided by the Federal Bank that helped keep the prices afloat, perhaps above what one could expect in the absence of intervention.
In addition to that, Goldstein adds that the stock market is meant to be forward looking and is meant to be different from the economy as seen from how the stock market and economy did not move in tandem even in the pre-pandemic scenario.
Besides, the stocks that have been doing well and hence contributing to an upward force are not necessarily a representation of the economy as a whole. Stocks contributing to this push include IT and Pharma stocks- both of which had a key role in transitioning life to the new normal. While companies such as Microsoft, Infosys, Google, Apple etc. made it easy for employees to transition to work from home, pharmaceutical stocks were driven by the global hopes set on it to vaccinate the population out of it.
Case in point: While economic indicators such as the GDP, NDP etc. project the practical, realistic situation of the economy, it is different for the stock market where values are majorly driven by investor emotions and market instincts. A gradual unlock and vaccine development headlines. In December 2020, the share price of Pfizer jumped 5% after Britain became the first country to approve the Pfizer-BioNTech Covid-19 vaccine and roll-out the subsequent week. The stock recorded an intraday low at Rs.4985/share and jumped to Rs. 5385.6/share following the announcement.
In addition to the above, the dip in price was seen as an opportunity by the layman investor -with a cut in income and even in some cases, the total absence of it hence amalgamating the common man’s savings into the market with the hopes of decent returns to make up for losses.
Simply put, the stock market’s bullish and bearish tendencies continue to be driven by a cautionary yet hopeful lot of investors as India shows signs of gradual fall in cases after a grueling, deadly second wave that defied all and any projections of economic growth expected in the first quarter, and perhaps the second.
