Do markets talk sense?
The buoyant trend in the stock market after the results of this round of Assembly elections surprised many, but as markets globally have proved in recent years, if there is cheap money available in the system, market players will use it to speculate.
AS the State election results trickled in on December 11, the Sensex, after a hiccup, rose and to the surprise of many, closed 190 points above its previous end-ofday level. The following day, too, the Sensex moved upwards. This, too, came as a surprise to many, since it was widely believed that the influential players in the market favoured the return of a Narendra Modi-led government in 2019. To the extent that the defeat of the Bharatiya Janata Party (BJP) in three important States was a signal of a possible defeat next year, investors were expected to walk out, triggering a market collapse. That did not happen.
This could be interpreted as the “markets” turning sensible. In fact, having gone wrong, some observers argued that their prediction did not prove right only because the markets had already made the necessary “correction” for a possible 2019 BJP defeat in their response to the exit polls, which, too, suggested that the BJP might not fare too well.
The Sensex had fallen by 7 per cent on the Monday (December 11) following the Friday evening (December 7) when the results of the exit polls were revealed and the shares that took a beating included those of companies from the Ambani and Adani stables—two industrialists who are alleged favourites of the leaders of the current government.
So, the buoyant trend in the market after the announcement of the election results was a surprise only because those who expected a downturn had not taken into account the fact that the markets had already factored in the political uncertainty following an unfavourable result for the BJP.
This explanation is a bit bizarre. It suggests that the market is so perfect that a one-shot “correction” can take care of the current political uncertainty. The Sensex, it is claimed, fell 714 points between the close of trade on Friday and that on Monday to “factor in” the uncertainty arising from the current government’s political vulnerability signalled by the exit polls. Once that was done, it could return to “normal” behaviour. And in this case, with global oil prices easing and signs that the Federal Reserve would hold back on raising interest rates further, which would stall the exit of foreign portfolio investors from emerging markets such as India, the Sensex must normally rebound, which it did on the day the actual results came in.
Reasoning of this kind is driven by the need to make market movements, termed “behaviour”, sensible. Investment advisers, market observers and journalists are not the only ones prone to such blind faith in the intelligence of markets. Viral Acharya, the Reserve Bank of India’s Deputy Governor and a professor of repute at New York University’s Stern School of Business, who one would think should know better, is also a member of the club.
Incensed by the political leadership’s interference in the affairs of the central bank, which he believes should be independent, Acharya lashed out at the government, warning it of invoking the wrath of markets if it persisted.
“Governments that do not respect central bank independence will