How the Stock Markets are up, when the Economy is down?

World and India has imposed a greatest lockdown to fight this Covid 19. The forecast from Economists are India will shrink its GDP and will be Negative for this year. This doom and gloom are something new in the last 50 Years…. Never Happened.

But not the stock markets, the PE levels of the few companies are even touched the pre covid Levels

How it is Possible for the Stock Markets are behaving like festival times, but the entire nation is mourning over its economy?

Markets are meant to reflect the economy but unfortunately they do not always do so. If the market is fuelled by fundamentals it is a great time for long term investors and secular growth when price rises because profits are on growth path

But the markets also go against the grain of fundamentals when fuelled by liquidity flows like Quantitative easing, rate cuts etc has infused cash in the system and has increased liquidity

When all the money ( Both the Excess Liquidity from US as FII Money Nearly 22000 Cr of FII Money has got invested in June 2020 and MF Monthly SIP Surplus of around 7000 Cr every month ) are diverted to investment markets giving an illusion that “all is well” everything is “back to normal”

Pls be aware that such liquidity driven bull markets need not sustain themselves and are likely to correct sooner or later when the liquidity moves out. Analysts were asked investors to be most cautious at these times .

Markets today are as expensive as they were before the pandemic Pre Covid levels. This means the corporate profits are down, fundamentals are down but but the market price isn’t reflecting the same. Price is rising although Earnings aren’t.

Also Markets reflect the Average of 30 to 50 stocks and at times a few stocks rise disproportionately making the Average look good. Keep this in mind before we generalize economic revival.

Conclusion

There are few investors who wants to take tactical advantage of market by timing the low levels. But i always insisted that take part in the market at staggered tranches. Spilt your lump sum investment over 3 month horizon and invest – you will never be disappointed.

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