Equity markets & sentiments
Do you think equity market and sentiments have any impact on each other or are co-related by any chance?
Well, the answer is a big yes! Human sentiments have a huge impact on equity markets, at least when seen from a short-term perspective. The volatility which we see or observe in the markets is driven by sentiments. After all, other than fundamentals, sentiment is the main driving force. Sentiments mean some kind of mixed emotions that investors feel while dealing in the markets. Expectations, greed, fear, worry, confidence, hope, rationality, intuitions, judgements, predictions, etc are visible when investors play in the market.
The latest scenario where sentiments played a significant role in equity markets was witnessed in March 2020. It was the outbreak of COVID-19 pandemic across the globe, followed by the nationwide lockdown in India. Not only in India but other major countries also adopted the lockdown solution and due to this, at one point in time, the whole world came to a standstill. This bought a wave of fear and uncertainty in people as to how will this get controlled, when will this stop, what will be its impact, etc. To be specific, Indian benchmark indices came crashing down by more than 35 per cent in less than a month in March 2020. Due to the uncertainty and inhibitions that going forward, liquidity will become an issue, investors just withdrew money from the markets to keep liquidity safe with themselves. Thus, the sentiments such as ‘fear’ and ‘worry’ have shown how markets get affected.
However, as the situation started easing, sentiments like hope, confidence & rationality took over and brought recovery in the market while the benchmark indices managed to reach their pre-COVID levels by Oct-Nov 2020. Since then, there has been no phase of looking back and the markets have been soaring high and making all-time high records. Fundamentals are getting stronger with declining fiscal deficit and rising tax collections, which are some of the factors contributing to keeping investors’ sentiments positive thereby, supporting the current rally.
Another scenario where a rally in the market was seen, also driven by sentiments, was before and during the announcement of Lok Sabha Election in 2019. During these incidences, why do you think the markets reacted positively? Again, hope, confidence, and expectations were the key drivers. People were hopeful and had expectations that this new government will bring in changes to shape the economy. The good budgets bought confidence in people that the business across various industries would get a boost and the overall growth will be seen in the economy.
Not only markets but to be investor-specific or stock-specific, sentiments do play a major role. Apart from conducting thorough research, investors often tend to give priorities to intuitions while making decisions about investment. Investors have to rely on their judgements and predictions to come to the final decision of making an investment. Equity investment is thus, a combination of science and arts.
However, a real investor is the one, who overcomes such sentiments and takes rational decisions. After all, these ups and downs in the market, led by sentiments are for a short span and not sustainable. Markets keep moving and have the ability to overcome all the hurdles over time. In the long run, it is the equity market that helps in creating wealth. So, the investors should stay alert and keep a distance from fear, greediness & extreme optimistic/pessimistic expectations.