Stock prices doesn’t always go in line with the present economic conditions or business fundamentals .
Humans are participants in market and there is human tendency to predict uncertain future events. Because of this innate curiosity of predictions markets values stocks and other financial instruments on the basis of what can happen in future.
Example:
Many sectors are linked to primary producers in India also more than half of population is dependent on agriculture and allied activities for their livelihood.
Now Say good monsoon is expected in India then market factors this good earnings in businesses in its present value irrespective of its present situations.
In this article we will through light on some of such extreme future anticipation made by market which cause irrationality in market due to corona virus breakdown.
Event 01 : First 100 corona virus cases in India.
Nifty started to head southward in later half of month of February when corona was actively spread in China only. At that time Nifty was at high of 12000 . In period of one and half month{ to the end of march} nifty fell all the way to 7800. A 30% fall from its high.
Total corona cases in India till the end of march was 305 ONLY.
PE of nifty was 25 at levels of 12000 . It reduced to 18 at levels of 8000. Such steep fall in nifty PE of 7 means that market was anticipating that profit of 3-4 years will be wiped out due to corona virus.
Which was insane because none of major pandemics impacted such long in history. Also we now have such advanced medical facilities that nowhere were available during past pandemics. .
In present age unlike 1920s governments actively intervene to bring back economy to normal though printing money, reducing interest rates, announcing stimulus packages and sometimes bailout of too big to fail institutions .
Although world was facing other parts of world was facing slowdown . There was no lockdown in India when there was only 300 cases which is nothing compared to today. Businesses was running smoothly. Despite such pleasant situation market fell sharply just because of anticipation of dark future ahead.
Event 02: June, 2020. Total corona virus cases in India is 3,00,000.
Fast forward to month of June.
Lockdown started from 22 march in India . All business are now more or less shut down from nearly 80 days . Lockdown has failed to prevent corona virus spread in India. Workers are migrated to their state and there is lack of availability of workforce in major economic hubs at that time.
But in such bad situations also nifty managed to rally to the levels of 9500 a rise of 20 percent .
Nifty recovered even though economic and pandemic conditions worsened in India . It is because people just found that death rate is as low as 2-3 percent and country will manage to open soon with necessary precautions. Shifting our work culture we all will learn to live with corona.
How this is helpful to investors
While taking economic decisions crowd does not behave rationally. Sometimes there is extreme fear sometimes there is extreme optimism in market.
Fear create buying opportunities of great companies which are trading below intrinsic value and has very high growth potential .On the other hand excess greed allows present shareholders to sell shares at much higher valuation that company deserves.
