ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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When Polls Exit, Bulls Enter!

Markets do not just love stability, they love authority too.

 

Sensex has, for the first time, crossed the coveted 40,000 mark with the initial break of this dream run starting on 20 May, a day after the exit polls were announced. The rise looks spectacular partly because of a relatively lower base, as a result of adverse global economic and trade predictions. However, the market fell by 400 points after the Reserve Bank of India (RBI) announced a rate cut on 6 June.

Notwithstanding the fall, an unprecedented rally such as this means that none of the major policy pronouncements of either the National Democratic Alliance or the United Progressive Alliance-II government could drive the stock markets in the same way as the exit polls. Why? Stock market movements factor in two components: long-term fundamentals of the corporations whose stocks are being traded, and immediate unexpected shocks to the system. A useful way of looking at the current movement would be to see, in Keynes’ terms, what part of the rise is speculative (short-term gain) and what part is due to enterprise (fundamentals). A greater weight on the former means the markets are over­valued and will require corrections, while the latter means that even though the current price–earnings (PE) ratios may be high, it is based on better expectations about the future of the economy. It is difficult to separate the wheat (enterprise) from the chaff (speculation) because what may seem like chaff today (overvalued market with high PE ratio) may actually not be so because it may be based on expected earnings, which may well turn out to be true. But what drove these sentiments in the last few weeks?

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Updated On : 24th Jan, 2021

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