The World Economy is down, and your Share Market is up, there is no relationship
As an investor, I am sure you too have this question in mind. You are asking yourself: why did the Sensex hit a low of 25638 in March’2020? The COVID cases were few then. Today, when we are at a million instances, Sensex is at a high of 37000. The scenario is mismatching, and the market should fall sharply from here.
Sometimes the wait in the market is long, and at times things move very fast. In the end, the Stock Market rewards only believers.
Few investors called us at the peak of panic in March and withdrew money, saying that the market will go down further due to lockdown.
Investors are also human beings; most of them become analysts themselves during a panic situation. They start taking decisions themselves. They forget that they came to advisors like Vridhi Money for advice. When the input is most critical during a panic situation, they ignore the same.
We would like to appreciate the majority of those who stayed invested during the volatility and also added new money after reading the article Sell that house you own and invest in shares and the articles which followed. The older investments are still negative, but the money invested during March end has nullified a lot of pain.
I am not sure if I can call the thought that there is a mismatch in the economy and the market recovery, but for sure, the theory is not entirely true. Market and economy cannot go in different directions forever. You are partially right when you say this for the short term. When you start comparing the data for five years and above the performances of both will be in tandem.
Imagine you are walking with your dog and are going to someplace. During the journey, you will at times be ahead of the dog and many times dog will be ahead of you. This is a short term view. Finally, at the end of the journey, you and the dog will reach the same destination! Now you got my point 🙂 This beautiful example was told to me by a fund manager of a mutual fund company.
Let’s move further; the market never reacts to what is happening today. The markets have the power to foresee what is coming a few months down the time. As earlier said, the problems in March were few still markets fell. It didn’t fall for March data; it fell foreseeing the state of the world economy in the July-September quarter.
Similarly, we today are wondering why the market recovered. Firstly, it has not recovered fully. We are much lower than where we were before the pandemic. Even the recovery is not broad-based, it’s quite narrow. Secondly, the market is now looking a few months down the lane.
The economy has partly opened up; the businesses have started functioning. May not be at 100% levels, but they are doing some activity at least. Hence things are much better than April. Be a believer in markets. The market knows more than what we know individually. The market is a collection of all brains.
There is one more reason to why the stock market is up while the economy is down:
During the Sub Prime crisis in 2008, no one knew what is happening and what is going to come. All the countries around the world took the time to go into action quite late after lots of damage was done.
This time all the governments around the world and the central governments around the world came into action quite early. The Corona started becoming bigger somewhere in Feb-Mar, and as of today, all the countries have taken measures to negate the effect. American has pumped in money more than the size of the Indian economy!
Stock Market is seeing a portion of this money also coming in. As we speak, the Nasdaq is already above from where it started falling, and the Dow Jones has almost fully recovered. America also has elections in November this year. President Donald Trump will do everything possible to keep the market afloat.
Is the Indian Stock Market due for a correction?
Rallies and corrections are part of the market. If a person wishes to see only one side movement, then it’s better to be in a Bank Deposit. We at Vridhi Money don’t see March type of panic right now. That scenario may occur if the country is forced again into a total lockdown due to spike in Corona cases. We are not experts on Corona so won’t comment on how that may tread ahead.
One thing you can be sure is a vaccine will finally get invented. Staying out of the market can be a huge opportunity cost. So stay invested, also keep investing in SIP form at least for the next few months.
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By Vivek Karwa