IT WAS JUST under a year ago, towards the end of March after the lockdown was announced that the stock market crashed to levels no one thought possible. The Bombay Stock Exchange (BSE) Sensex went below 26,000. A month before that, it was at 40,000. And now here we are, with the economy still in the doldrums and the end of the pandemic still some distance away, that the Sensex for the first time in its history crossed 50,000. Just as the bottom level had been unimaginable, the peak now is just as incomprehensible because the stock market has one ironclad rule—over the long run, it must reflect the state of the economy. As Benjamin Graham, the father of value investing, had pointed out—in the short run, the stock market is a voting machine, in the long run, a weighing machine. Supply and demand drive immediate prices of stocks but eventually it will have to mirror the performance of the company and, the Sensex, which is a group of the 30 best companies of India, will have to correlate with the state of the economy.
The 50,000 crossover might, therefore, be the voting machine in action. However, even if there is a reversal at some point, which again brings it back to reasonable levels, what the Sensex has also mirrored is the India story and it has been one of optimism. The index level was pegged at 100 for 1979. Which means that there had been a 500-fold increase in four decades. Much of it has been post-liberalisation with just as wild swings as we are seeing now. In 1990, for instance, the Sensex was at around 1,000. Two years later, it would rise to 4,000 on the back of the Harshad Mehta scam. But it would take till 2006 to touch 10,000. Since then, despite the 2008 investment banks going bust, global recession and Covid, it has continued to gallop away.
Why is it peaking? Because the markets are only concerned with the future and it expects the pandemic to end now that vaccine rollouts have begun. Also, central banks across the world have been pumping in incredible amounts of money into the system to stave off recession. That has to go somewhere and a lot of it lands in equities which promise greater returns. But these are double-edged swords. It is liquidity backed by crippled economies and one big pin will burst the bubble. Some veteran investors, like Jeremy Grantham, are even predicting a crash on the scale of the 1929 US depression. India seems especially vulnerable at this moment because it had been an economy that was tottering even before the pandemic. A global event will lead to foreign money being sucked out just as it happened last March, and then there could be another big bottom from this historic high.
But then the Sensex perhaps only reflects the uncertainties of the world that we have entered now, where seesaws are no longer outliers but regular phenomena. If you are, however, willing to take a long-term view, then 50,000 might just be one more ordinary milestone in a long story.