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Stock market insights Unravelling the reason behind the post pandemic rally

Introduction:

The COVID-19 pandemic gripped the entire world in the early 2020s. Besides killing more than 7 million people across the globe, it brought economies to a halt, causing markets to plunge into one of the most severe downturns in history. On Monday, 16 March 2020, DOW Jones plunged by a record 12.9% on a single trading day. In India, the Sensex plummeted by 8.18%, whereas the Nifty declined 8.30% on the same date.

Fast forward to the post-pandemic era, and you are witnessing an astonishing recovery in the stock markets worldwide. The indices are at their all-time highs, with Nifty and Sensex breaching the 21,000 and 71,000 landmarks. After the market closing on Friday, 22 December 2023, the Nifty 50 stood at 21,349.40, whereas the Sensex stood at 71,106. 

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But the burning question remains: Is this constant stock market rally driven by genuine economic fundamentals? Or is it just because of the strong buying interest caused due to the Fear of Missing Out (FOMO)?

What are stock fundamentals?

Most investors prioritise analysing the stock's fundamentals before investing in it. These fundamentals encompass all data associated with that stock. By analysing this data, investors aim to discern the disparity between the stock's perceived price and its intrinsic value. This meticulous data collection and analysis empower investors to make informed investment decisions. Fundamental analysis zeroes in on certain key metrics, such as cash flow, revenue from operations, profit after tax, return on equity, etc.

Investors typically analyse these factors to understand how the company has performed in the past, and on that basis, determine its future growth prospects. Generally, stocks belonging to companies with strong fundamentals appreciate over time.

What is FOMO?

As mentioned, FOMO stands for the Fear of Missing Out. FOMO describes the actions taken when an individual is gripped by the anxiety of potentially missing a favourable opportunity in the market. For example, driven by FOMO, investors might pour money into a specific stock fearing they might otherwise miss a promising investment. This phenomenon can lead investors to make risky decisions that might not be advisable.

FOMO becomes evident Within the financial markets when investors grapple with regret after bypassing significant market upswings. This intense desire to seize every potential opportunity often propels investors into rash and unreflective decisions. FOMO can create strong buying interest in the market, which in turn, can cause the stock prices to rise temporarily.

The case of fundamentals

  • Strong corporate earnings

One of the primary drivers of stock prices is corporate earnings. As economies reopened post-lockdowns, many companies reported robust earnings, exceeding analyst expectations. These earnings reflect genuine business activities and are a testament to companies' resilience and adaptability during challenging times.

  • Central bank support

Global central banks, such as the Reserve Bank of India (RBI), have implemented expansive monetary policies. These policies, which include a reduction in borrowing rates and quantitative easing, have provided significant liquidity to financial markets, supporting stock prices.

  • The rollout of vaccines

The successful rollout of COVID-19 vaccines has been a game-changer. It has not only saved lives but has also restored consumer and business confidence. A vaccinated population means a faster return to normalcy, benefiting a broad range of industries from travel and hospitality to retail and entertainment.

The case of FOMO

  • Increasing retail participation

The surge in retail trading, facilitated by user-friendly platforms and zero-commission trading, has played a role in driving certain stocks higher. The phenomenon of "meme stocks," where stocks are propelled higher by social media hype rather than underlying fundamentals, is a clear example of FOMO in action.

  • Momentum trading

In a market driven by momentum, investors may buy stocks not because of their fundamentals but because they are going up. This herd behaviour, fueled by FOMO, can lead to overvalued stocks detached from their underlying fundamentals.

To conclude

As you can see, both fundamentals and FOMO have played pivotal roles in driving the stock market rallies since the COVID-19 pandemic. As an investor, you must know how to differentiate between companies with solid fundamentals and those caught up in speculative frenzies. A disciplined approach, focusing on thorough research and long-term value, remains the cornerstone of successful investing, irrespective of market conditions.

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