The stock market bubble

A real concern or confused market parameters?


An assertion like ‘Had you invested in the stock markets in 2011, your investments would have doubled by now’ triggers an urgent rush to invest in the market, bringing in the feel good hormones in most people. But often times, it is extremely misleading and the results could be catastrophic.

A stock market bubble is when the prices of assets rise exponentially, often not justifying their actual value.

Investors in 2020 faced a similar conundrum. With the pandemic induced lock-downs causing normal life and businesses to go haywire, the general investor felt it was better if they pulled their money out of the market. This led to the leading market index NIFTY50 dropping to 7,500 levels,a 40% decline from its value in January 2020(NSE india). As a result, the market became almost risk free and the only way ahead was up.

Investments started pouring in as the Covid-19 cases eased by August and significant institutional and foreign investors started pouring in money into the Indian stock markets because of their abnormally low levels. The domestic average investor soon followed suit and the markets saw a revival. In fact they rose to record highs( From record lows just a few months ago!) and the expectation of ‘winning’ a trade led to impulsive buys.

Perception versus Reality

Investors are not always sensible or rationale in their investing decisions and can be prone to various types of ‘bias’. These phenomena can explain the prevailing overtly optimistic market sentiments even when the macro-economic indicators are lacking behind.

Even with parameters like the G.D.P and inflation on the wrong side of desirable, and unemployment rate sky rocketing in 2021, the profits that the top 50 companies made in India in the last fiscal year has increased. This resulted in a lot of investors ignoring those macro-economic trends and could be the reason as to why the stock market segment is rising irrespective of it.

Hence the ever increasing corporate profits and the ‘feel good’ hormones can attribute to the ascend of the stock market levels from the previous years ruins but the question remains, ‘How long can this last’? Established wisdom suggests that corporates cannot sustain a contacting economy for long and that it is bound to catch up with it sooner rather than later. Caution is advised to investors with a majority of their money in these instruments. A bubble burst is in the realm of recurrent reality and cannot be ignored as a figment of the imagination.