In America, around 55% of people spend their money in the stock market and about 1.5% in India.
Now we are seeing tremendous growth in the Indian Stock Market. It has crossed its valuation for the first time and became the world’s 7th biggest stock market. Due to this rapid growth, we can see a lot of youths are getting attracted towards it.
One question which made many of us cogitate on is; Why is the stock market is flourishing but the economy has been going down?
If I talk about last year, according to government estimates Indian economy contracted by 8%. Moreover, 75million Indian were pushed into poverty and the middle class shrunk by 30million.
So, when the economy plummeted, but the market is booming that’s why we call it years for the buoyant market.
Here, I would like to quote Paul Krugman, a noble prize-winning economist who says;
The stock market is about one piece of the economy – Corporate profits and it’s not even about the current or near-future level of corporate profits. it’s about corporate profit, over a somewhat longish horizon.
If I talk about the nature of the stock market then, that is forward-looking and looks towards the future.
But in the case of the economy, it’s quite backward-looking.
But Why Is Stock Market Rising?
Ruchir Sharma, a Global investor, and author in one interview said, during the pandemic, the rich have cut their spendings and it’s not surprising also because all other activities are kept halted like restaurants, transportation industry, and shopping malls as well.
During any economic crisis, the most common response of a Central bank is to lower the interest rates. That makes businessmen and common people get a loan easily, and can spend that money the way they wanted to.
Tara Sinclair; an economics professor at George Washington University, said, when interest rates are low, the stock market becomes a better option for wealthy people around the world to put their money than alternatives like bonds, and savings.
Alicia Gracia Herrero, an economist, points that there is a great disconnect between a booming market and a very uneven economic recovery. Central Banks know what they are doing – basically lowering the return of safe assets to increase demand for risky ones. Once you do that, you know a bubble might appear but the cost of not doing anything is probably even higher.
The Pandemic Effect
Digital adaptation has rapidly increased since the pandemic started. According to a Razorpay report, In India digital payment grew by 80% in 2020.
The digital adaptation didn’t just occur in online payments. Zerodha a popular app revealed that in the first quarter of 2020 it only had 250000 new investors. However, by the second quarter the number rose to 500000. It’s one of the most popular apps for online trading.
Confined to their homes, students, and youngsters who had enough time find it interesting to invest in the stock market.
In Financial Stability Report the RBI asserted that there is a disconnect between certain segments of financial markets, and the real economy has been accentuating in recent times both globally and in India. Stretched valuation of financial assets poses risks to financial intermediaries. They need to be cognizant of these risks and spillovers in an interconnected financial system.
On this Mark Mathew of Julius Baer, (a large wealth management company) said, The Indian stock market is not overvalued and the price fall closer to the real price.
Now only time can tell if we are in a stock market bubble or not and it’s very difficult to predict.
To conclude, we cannot deny the fact that the stock market indicates the situation of the wealthy people only. Meanwhile, the working class is facing unemployment and poverty and the middle class is suffering due to the pandemic.