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It won’t be a hyperbole to say that stock markets are on steroids. Since the lows of March 2020, all major indices across the world have more than doubled.
Yes, all this while, when economy has been in doldrums and struggling hard to emerge out of it, stock markets have been multiplying the wealth of investors.
But when you talk of stock markets, can they rally so much at a time when economy is in tatters? Well, it very well can. A person usually invests for future returns. So, markets value themselves on six months forward earnings estimate. That is what market experts suggest. However,, that is only on paper. Markets, at times, defy logic and behave erratically.
Let us presume that markets have been rallying since March 2020, based on optimism about future. However, can any analyst or investor beyond a shadow of doubt guarantee that the COVID-19 pandemic – the root cause of all this chaos – would be over by next six months? It is tough and almost impossible to be 100% sure about when this pandemic will end, yet markets have been optimistic.
This makes one ponder where does this optimism stem from? Well, as the world economy crumbled due to the pandemic by the end of April 2020, governments across the globe rolled out stimulus packages with a combined value in excess of US$6 trillion. Hardly any of this money went to the productive sectors. The money which was meant to boost consumption in the real economy, ended up boosting stock markets. If we can put it in a most honest way, the funds meant for economy were diverted towards stock markets.
This indeed has caused a bubble in stock markets. The price to equity (PE) ratio across the world has been soaring in last one year, as investors are seeing shares become dearer to them without much improvement in the fundamentals.
Many experts have rightly called this a stock market bubble. Does that mean there is a need for correction in markets? Yes, there is and a massive one at that.
But for any correction to happen, there needs to be a trigger. In three years up to 2020, the world economy had been in sort of a slowdown, and earnings were muted. Yet markets were rallying. But then correction was triggered by the pandemic – a correction that led to massive bear run in the markets. But now it seems like even if people haven’t been fully vaccinated against the virus, the markets have been.
Back in 2013, when then Fed Chief Ben Bernanke hinted at withdrawing stimulus to counter effects of Great Depression, it led to massive share market correction across the world. Mr Bernanke, at that time, threw what we now call as Taper Tantrum.
This time also, the central banks have fished around hawkish waters. Yet markets weren’t affected as they seem to have been unfazed by central bank comments as well.
Yet, all that markets need for correction is a trigger. And this time, it may come from faultlines coming out of fundamentals.
