2020 was ridiculous, right? Wasn’t it the most surprising year? Everything like literally everything took place during the year namely COVID-19, Forest Fires, Hurricanes, Floods, Gas leak and explosions, Tsunami, Volcanic eruptions, Locusts attacks, and whatnot. Another one to add to the list is the stock market crash in the first quarter of 2020. Guess no one would even get a nightmare like this.

Y2Y performance of major US stocks

Everything remained the same and it’s the effect continued to be there but the stock market flourished after the crash. That’s okay but the question remains, why? There have been no major changes across the world. Is there another Harshad Mehta growing up? 

Be it be Sensex, Nifty 50, Nasdaq, S&P 500 or Dow Jones, all the indexes around the world have more or less hit an all-time high during this very famous year. 

What has caused these indexes to flourish?

The Stock Market Crash in March 2020:

 On March 9, Dow Jones Industrial Average, the leading US stock index fell 2014 points. Dow’s worst single-day drop in points in history. The S&P 500 also fell by 7.60%.

On March 12, also called the Black Thursday, the Dow fell a record 10% by 2,352.60 points, a single-day stock market correction. S&P 500 and Nasdaq dropped by around 9.5% on the day.

In India, BSE Sensex following global sell of stocks, fell by 2,919 points, posting an 8.18%, largest intra-day loss. The NSE Nifty 50 also recorded a similar decline of 8.30%.

On March 16, The Dow dropped 2997 points, a 12.9% decline, a similar decline was only seen back in October 1929 Black Monday.

On March 23, The S&P BSE Sensex fell 3,935 points or over 13% to end at 25,981 levels with all the 30 constituents ending in the red. NSE, the benchmark Nifty 50 fell a whopping 1,135 points or 13% to end the session at 7,610.

By March 24, the stock market crash had wiped clean equity wealth worth 40% of India’s Gross Domestic Product.

Current Scenario Of the Market (As at mid of January):

As at mid of January;

Nasdaq was trading all-time high at 13,000 levels. S&P 500 was trading all-time high at 3,700 levels. Moreover, even Dow Jones Industrial Average was also trading at all-high at around 31,000 ranges.  

Coming to India, the Indian stock market has experienced Sensex hitting all-time high at more than 49000 levels and Nifty 50 crossing 14,000 for the first time.

These all hitting all time isn’t a big deal but coming through the year full of Human Misery; this just seems to be impossible. Even during the Early 2021 World experienced Bird Flu, New Covid-19 Strains and many more but still these did not affect the Stock Markets. 

Reasons for the Market Rally:

The befuddling economic reality of the world at the close to 2020 is that everything is terrible in the world, while everything is extraordinary in the financial markets. Stock Prices keeps moving up and on the other hand we get so many people dying of Covid-19, many filing complaints of unemployment. We need to understand this strange mix of upward force of the markets and economic despair.

In the United States, the total employee compensation was down by 0 5% whereas the number of jobs was down by 6%. How can that be possible? 

Yes, that might seem impossible but it has to do with the type of jobs lost. The pandemic had affected the low-paying service jobs. Others were more or less not affected. Few sectors boomed such as the warehousing and grocery, leading to higher income for those workers. 

Employee compensation did drop but what about the unemployment insurance benefits which were 25 times higher when compared to the previous year. This partly reflects that millions of jobless people were seeking benefit. But also reflects a $600 weekly supplement to jobless benefits that the act included, along with a program to support freelancers and contract workers who lost their jobs. So ultimately there was a little drop in the total employee income.

Now let’s look at the other side of the wall, spending.

People did not use services such as the flights, concert tickets, partying at clubs and many more.  This eventually leads to a drop in the expenditure of the people. The expenditure on Durable and Non-Durable goods rose whereas the expenditure on the miscellaneous outlays declined and the overall outlays declined. 

These situations lead to a rise of 173% in savings when compared to 2019. Now, these savings had to go somewhere. So the deposits in commercial banks increased and people with little comfortable risks invested in stocks.

US consumer spending during COVID-19

And certainly not to forget the role which was played by The Federal Reserve. It had lowered the interest rate to almost zero, bought government debts and supported the corporate markets.    

India 

Amidst Covid-19 crisis, the Nifty is almost touching 15,000. We are into recession with two quarters of negative GDP growth rate. This is abnormal, why is it happening? The 2020 year had seen it all, however could not affect the stock market. What are the reasons for such high valuations?

Sensex, NIFTY their lowest in three years
Sensex Recovery

Foreign Institutional Investors (FII) has been heavily investing in Indian markets. They are one of the main reasons which have driven the markets; having invested around $30 billion in the financial year 2020-21(as of Jan 7).

They were attracted to emerging Indian markets due to decreasing interest rates in the US Bonds Yields. The FII got access to a lot of money as the US Fed had printed $4 trillion which is a bigger amount than India’s GDP in USD dollars. Not just that but 34% of all US-Dollars which have ever be printed in world, were printed in 2020.

To save the economy and to avoid deep crisis, Government kept printing money which in turn helped to maintain liquidity.

The RBI and the Government has almost made it clear that at this juncture, the objective of kick starting growth is more important than inflation control. Liquidity is ample, interest rates are low. Now, for the Indian consumers and the corporates will benefit from these lower interest rates. They can more and more with the same EMI. 

Last but not the least, Indian Government has begun to implemented reduce tax for new investments, production linked incentives for more than 10 identified sectors, support for medium and small enterprises, privatization of PSUs and many more which has kept the investors sentiments positive.

The potent combination of the last two factors discussed above can keep sentiment buoyant and allow markets to ignore corporate results and valuations for a few quarters. Moreover, while valuations do look expensive on certain parameters, they are justifiable on certain others. Ultimately, they indicate that the market expects a smart recovery after negative growth in FY21.

Conclusion:

Just because you can explain these market gains doesn’t mean that high asset prices will hold. You could tell a story in which the economy roars back as people are vaccinated, and the entire pattern reverses itself such as with the savings rate turning negative as Americans spend down their stockpiled wealth on trips and other luxuries that have been off-limits in 2020. It could spur inflation, which, if severe enough, could cause the Fed to back off its easy money approach sooner than people now think. People have to be ready for unpredictable negative or positive situations which might be coming in their way.

But 2020 teaches one thing; it is that the story turnover is more unpredictable than you might think.