Why The Strong Stock Market is Justified

On March 22, 2020, we witnessed the bottom in stock market. At least in India and USA. I do not track other markets closely enough to comment on them. While the economy in India is barely walking at best, why is the stock market running? Isn’t stock market supposed to reflect economy? What does the Strong Stock Market actually imply? Actually even after and with so many bad new the stock market bull run continues.

While US markets have gone back to life highs, Indian market has not near there life high, I think they are at least 10% off from their life high. And when you drill down and check the mid caps and even large caps, most stocks are not near 52 weeks high. IT is up. Why? Because analysts suddenly realized, IT industry can work from home and a week rupee will boost their topline. And one reason they have come up with, that the clients will boost the IT spending, which will boost IT services revenue growth. I think this is ridiculous, but I will tell you later, why I think that.

Another heavy weight is RIL or Reliance. First time in India, we have a listed entity in ecommerce space. Which at this moment sucks big time. And if Mukesh Ambani who is world’s 5th, richest man based on RIL stock price, then one would wonder if Jio Mart will be able to compete with Amazon or Big Basket, which are providing better service than Jio Mart. If you have not used Jio Mart yet, you can go and read some reviews or experiences shared on internet, The feedback is bad, although I expect them to improve in future.

Parma stocks and FMCG stocks are up too. And understandably. Even during lockdown we needed FMCG. Pharma is up because Analysts think API manufacturing will come back home, and may be Indian pharma companies will sell more pills to world, mainly to the USA. But, mark my word, pharma sector is very vulnerable, and governments can regulate and impose price control. Nobody pays for medicines in a happy state of mind. Personally I never thought that these generic pharma companies should have pricing power. Like a rising tide, a Strong Stock Market lifts all boats, I mean all stocks.

Bank shares are puzzled, nobody knows how the loan restructuring will turn out. But I am sure sell side analysts will give you million reasons to buy with a higher price target. Maybe you should read some analyst reports and price targets for Yes Bank before everyone gave up hope. Remember, banking is one business, where making a sale means, giving out money. In most other businesses, money comes home in exchange of service or product.

Auto and other rate sensitive sectors are high, because interest rates are low, and analysts have happily jacked up target prices based on year 2030 projected sales or something like that. Because in reality auto sector is not good. People are losing jobs, well paying jobs. Unemployment number is around 10% in the USA and nobody is sure that there won’t be further job losses, and same story in India. People are taking out money from retirement savings, and borrowing against gold. But if you see analyst projection based on 2023 sales, market must be cheap.

Beside economists, and recently virologists, stock analysts are one species who are not supposed to get anything right. I do not know how they keep their jobs. I understand the business model. They research( listen to analyst calls and listen sales pitch from CXOs) and increase price targets based on pre-existing formula in excel sheet. As you buy, the brokerage house gets brokerage and makes money. How many times have you seel sell call on any stock? Anyway, while I am painting a grim picture of reality on ground, why do I think the index is justified?

Stock price go up when investors buy stock. And investors can buy stock because the other alternatives are not good or there is no other alternative. Stock market is not supposed to show economic condition. USA printed trillions of dollars, sent stimulus checks out. Many had extra cash to invest in stocks, because now in market there is a wave of “buying the dip”. The pension funds need to generate 7% return to sustain themselves. So, they buy stocks with hope that they will make 7% year after year. They do not have alternative. Bond yields are negative when you consider inflation. Even junk bonds are not giving good yields. So, due to the TINA effect, there is no alternative other than stock market, hence the Strong Stock Market.

Even in India bank FDs are giving less that the retail inflation rate which is 6.9% right now. That means, real yield is negative. My point is investors has money ( not everyone is an investor unfortunately and that is partially one reason why rich gets richer) and they do not have anywhere else to invest. They cannot sit on cash, because their returns will go down. Here by investor I mean mutual fund, pension fund, etc. big players. As water from sky finally goes into the sea, the printed dollars finally go into the assets and inflate asset bubble. If you have assets, then you will feel very different that a person who does not have any physical or financial assets.