After the recent low for NIFTY on March 24th, 2020, the index is up over 40% as of July 17, 2020. More than 40% gain in three months, during a pandemic?
Its understandable investors are wondering why there’s such a disconnect between the stock market and the economy.
Last quarter was one of the best quarter for the NIFTY since financial crisis of 2008. The recent stock market rally isn’t as strange as you may think, despite economic conditions. Here are the five reasons to help explain recent stock market gains during the pandemic.
1. First, and perhaps most significantly, economic data looks back and the stock market looks ahead and hence there is disconnect. Economic data is based upon last 1-year activity while stock market is looking ahead next 1-year activity.
2. Second, the market hates uncertainty more than bad news. When the crisis started, there was a lot more uncertainty in terms of how it will unfold and its impact on human kind and businesses. Now, almost six months into it, the uncertainty has reduced significantly with businesses adapting to the new world order.
3. Today, fixed income returns are minimal, with fixed deposits offering less than 6% returns pre-tax and 4% post tax. With the dividend yield on the NIFTY at 2% and with a good possibility of an upside, it’s hard for long-term investors to justify reallocating money to fixed income.
4. Impact of pandemic is decrease in corporate earnings for 2-4 quarters while stocks are valued on earnings over next 10 to 20 years. Some industries have affected for long term due to pandemic however most will bounce back and hence buying those sectors/stocks at attractive valuation makes sense.
5. Finally, the monetary and fiscal response to the COVID-19 has had a lot to do with the market recovery from the recent lows. Globally, governments and central banks have announced liquidity measures with almost 5% to 20% of GDP. With so much liquidity in the market and fixed income returns at all-time low, money has flown into stocks and may keep flowing.
Have we passed the bottom? Will it correct again? These are the questions we keep asking ourselves. Stock market is not the place to get affected by short term market fluctuation. Instead, try to stay focused on factors you can control. This includes how you invest during a crisis and following your cash flow investing plan and dynamic asset allocation to weather the storm.