Why the stock market rallied despite weak economic data

Ever since a national lockdown was announced in March 2020 in the wake of Covid-19, we have been witnessing traumatic news in the form of:

  1. Life losses
  2. Job losses
  3. Rising unemployment
  4. Salary cuts etc.

Except for the major crash of March 2020, the Indian stock market has on contrary to popular opinion relatively remain unscathed till September 2020.

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Click Here to read our interview with the Fund Manager of Union Mutual Fund, Mr. Vinay Paharia where he also speaks about the impact of Covid-19 on various companies 

So what has contributed to the Indian stock market reacting in a manner that can only be considered as difficult to comprehend and being incompatible with the ground economic realities?


Government stimulus world over

Governments across the globe and not merely the major economies have announced heavy stimulus packages for their respective economies.

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This has worked as a crucial balm to the various wounds that economies would have otherwise had to face, this by no means can be seen as the one and only measure to resurrect ailing economies but they have helped cushion the blow to some extent nonetheless.

  1. Japan spent 21.1% of its GDP on Covid-19 related economic stimulus measures.
  2. The United States of America along with various unemployment assistance worked out an economic stimulus package to the tune of 13.3 % of its GDP.
  3. Australia spent 10.8% and Germany 10.7% of their GDP’s on their respective economies.
  4. India spent around 20 lakh crore as its own bailout package whereas the EU (European Union) as a whole responded with a 3.5 trillion dollar package.

All in all, the various economic packages announced by several governments and world bodies had not only softened the blow but also resulted in massive liquidity.

Market over reaction

  1. There’s a very recurring statement regarding stock markets that they rarely have rational reactions.
  2. There’s been a strong consensus across various schools of thoughts that the Indian stock market over reacted to the pandemic in March 2020.

Sensex went from 41,565 on 12th February 2020 to 25,981 on 23rd March 2020, a fall of more than 15,000 points within 45 days.

The strong recovery in the market could be seen as a sign of it compensating for it’s over reaction.

Recent events have also made it imperative for all stakeholders to form opinion on various market indices based on the companies that make them.

A good case in point to the above observation is the US stock market which is driven by major technology companies in stark contrast to its economy which is a heavily consumption driven economy.

So it would not be unreasonable to justify gains made by the US stock market despite lockdown considering their stock market is mostly covered by tech stocks.

Click Here to read our views on investing in US themed mutual funds.

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State of the Indian Economy

Even prior to the pandemic, the Indian economy was anyway an ailing one.

So, the correction in the Indian stock market was seen as overdue.

  1. As expected, businesses did take a hit but not as much as was predicted which was a relief.
  2. India’s balance of payment also took a turn for the good since oil imports were low along with an ever decreasing trade deficit with China.
  3. A monsoon on expected lines along with a jump on rural spending also added to the much needed stability of sorts.

The stock market is not the economy, it is only an indicator of the economy.


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Excess Liquidity

Lockdown has meant a shortfall in income for all in varying proportions.

  1. Despite this there’s been an increase in demat accounts with retail investors looking to make a quick buck in the ever rallying market.
  2. Some with a surplus of cash see it as an opportunity whereas others see it as a quick way to cover up the shortfall in income.
  3. This rapid thrust of money in the stock market along with the various economic packages around the world has resulted in enormous liquidity in the stock market driving up even stocks with poor fundamentals and less to no earnings.

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Businesses related to the hospitality sector which had been shut for several months with no fresh business still had their share prices see an upswing with no regard to fundamentals.

The heavy flow into the stock market has been aided by both retail investors looking for instant gratification as well as by Foreign Institution Investors.

The Federal Reserve (USA) from around the last week of February 2020 up until the first week of August 2020 has printed more than $2.8 trillion.

Some of this has made its way into the Indian stock market via FII’s.

The fact that banks have cut down fixed deposit rates too has only encouraged retail investors to take the stock market route.

This includes senior citizens too who were otherwise dependent on monthly interest income as a source of income.

Click Here to read why Fixed Deposits are a very poor choice for long term investments.

Vaccine talk and further stimulus

      Even since the lockdown began worldwide so have discussions on a vaccine simultaneously.

  1. The regular updates on the same is the wave of optimism stock markets across have ridden on.
  2. Any update even though it may be not be the final product is seen as a major breakthrough considering the dire circumstances we currently find ourselves in.

No just in India but across the globe there are expectations of further stimulus.

This mind you does not necessarily mean that it has to be in the form of economic packages announced earlier.

             Historically gold as an asset class touches the sky when there is economic and political instability corresponding with stock market volatility. This time though we have witnessed unprecedented jump in gold as well as the stock market which only proves how rare the entire scenario has been.

             The stock market has historically only looked ahead and it would be foolish to bet on otherwise. It usually takes into account what we fear might happen and in certain cases even the things we do not. Unfortunately, the retail Indian investor has usually acted contrary to this and has looked at recent returns (not further back) which has resulted in damages that can have a lasting impact in every way possible.

              The stock market may behave irrationally in the short run but in the long run fundamentals have the last laugh so therefore no matter where you stand today, as an investor there could not be a better time to inculcate a sense of rationality to one’s portfolio.


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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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