What is your view on the disconnect between the market and the economy?

I read the views of a person with financial acumen on a Whatsapp post, pointing that GST collection is less, the income-tax collection is less, the government doesn't have money and industrial units have been closed for the last three-four months, companies' financial growth has slowed, however, the Sensex has kept on rising. It said that the Sensex and stock market bubble is going to burst and common investors are going to be harmed in a big way because the index is not in synchronisation with the economy. What is your view?
- R S Dahiya

Yes, there is a disconnect between the market and the economy. The market is governed by two things. In the short run, it is traded on liquidity and we have had plenty of liquidity. The finance ministry gave its own stimulus package. Investors sitting at home opened a number of Demat accounts. On the other hand, foreign money continues to flow from foreign investors because of their own liberal stimulus package.

I agree with you that the outlook for many companies is very grim. But everybody has also factored in that. The market is still down 10-15 per cent from its peak level, prior to the crisis. Although there is a disconnect, nobody knows whether this will translate into a big correction or a big fall for the Sensex. Nobody expected the big rise ever since we saw the fall. The market seems to have reasonably recognised that this is a washout year. For example, we are not witnessing any growth in car sales, banks are extending their moratorium on borrowers, and so on.

So, it is concerning and there is a disconnect. Your concern seems to be valid. When it will translate into what, I don't know. Correction can happen in two ways. One is that there is a market crash or the market declines 10-15-20 per cent someday triggered by a set of circumstances, which will drag the market. The other way the market could correct is that it does not go up for a prolonged period of time, which is also a time correction, translating into a market correction. I do not know which of these two will happen. It is also a function of the outlook of the market in terms of how sharp a recovery will be.