Why the stock market does not follow reality

Investors need to study the facts and not just follow the herd

Economic turmoil does not necessarily translate into a market downturn, especially if the turmoil is expected to be short-lived, says the writer. Since stock valuations are determined by future corporate earnings, the belief of a robust economic rebo
Economic turmoil does not necessarily translate into a market downturn, especially if the turmoil is expected to be short-lived, says the writer. Since stock valuations are determined by future corporate earnings, the belief of a robust economic rebound once coronavirus lockdowns are lifted provides justification for a rallying market.PHOTO: REUTERS

The first half of 2020 was unprecedented in many aspects. A global pandemic no one expected appeared and triggered widespread lockdowns, which quickly brought the global economy to a virtual standstill.

In a short span of several weeks, the S&P 500 along with other major indexes plummeted nearly 30 per cent, ending the longest bull market in the United States.

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A version of this article appeared in the print edition of The Sunday Times on July 12, 2020, with the headline 'Why the stock market does not follow reality'. Print Edition | Subscribe