Why is Market Going Higher Despite Bad State of the Economy?

I am getting the question from many of my readers as well as forum members. Why is there a strong rally in the market when the economy is in such bad shape?

When it comes to bad news, we have:

1. Corona Virus cases are highest in India now (compared to the past).
2. The daily number of cases is highest in the world now. (As per worldometers.info/coronavirus)
3. Many have forecasted Indian GDP to contract by as high as 5%.
4. There is so much uncertainty on the second wave of the impact of the Corona Virus.
5. There is no timeline for the Corona Virus Vaccine.

And many more.

However, when we see the Nifty, it has gained 40% from the low of 7,500 we saw in March 2020.

Here are the top reasons that I see why the market is rallying.

1. Market Reverts to Mean

There are two sides to every coin, and the market is no different.

We have long and short both.

In other words, we have bulls and bears.

The market went down from 12000+ levels to 7500 levels in a matter of days.

Even after the 40% rally from the bottom, still, the simple 200 DMA indicator in the above chart is way higher.

Maybe the current rally in the long-term context may only be a market reverting back to the mean.

2. Too Much Liquidity

Every country has come out with packages to help their economy.

A country like Germany has 50% of its GDP as a package to get the economy back on track.

India and the US have been in a range of 10% of their GDP.

With so much money being printed, it is more likely that most of that money will find its way into the equity markets around the globe.

Moreover, if so much is done to save the world economies may mean the businesses that can survive will find it easy to grow and thrive in the post COVID environment.

Moreover, the economies that can control the impact of COVID can grow and thrive as well.

Each country is willing to do whatever it takes to get it done.

3. Markets are always Forward-Looking

The best part of the market is, they are forward-looking.

When Indian markets crashed in March, the situation that was discounted was that of few months down the line.

In March the economy was not in bad shape and the market was discounting the bad state of the economy couple of quarters down the line.  Similarly, the market may be discounting some good news in the next couple of quarters as well.

Now with things are as they are, it may not be as bad as the market may have anticipated in March.

Remember, Mr. market is way more intelligent than every market participant.

Conclusion

Instead of trying to find why the market went down or why the market is going higher despite the bad state of the economy, my suggestion will be to focus on how the portfolio is performing.

Why is the portfolio doing poorly? Moreover, what you can do to make sure your portfolio doesn’t do as badly even if the market does badly from here on.

I am investing in small tranches in these solid businesses and strengthening my portfolio even more.

Are you doing the same?