Decoded: What are the reasons behind the bull run as Sensex hits 50,000?

Sensex moved up 20 per cent in the last 12 months since January 2020.

Well, 50,000 is just another round number, so let’s put the Sensex hitting that mark in perspective. The Sensex, or the BSE-30 Sensitive Index as it’s formally known, is an index that tracks the movements of 30 of the largest stocks listed on the BSE. It’s moved up 20 per cent in the last 12 months since January 2020.

What is the implication?

Investors in the stockmarket have received decent returns in this period. Some of those 30 largest listed stocks have gained more, others have gained less, some have gone down. But the net movement is up by 20 per cent. Since the majority of listed shares tend to move in unison most of the time, investors in other stocks will in general, have received positive returns.

What are the reasons behind the bull run?

In the final analysis, share prices go up because investors are willing to pay more. Various investors will have different reasons for being prepared to pay more. One possible reason is that the economy is recovering after an extended period of contraction and you’re feeling optimistic. Another is the hope that there will be some sops in the Budget to keep sentiment buoyant. A third reason is that you think stocks that have gone up, may go up even more and you’re afraid of missing out. This is momentum trading logic often described as “You’ve gotta dance while the music is playing!”

What happens next?

Maybe all the logic given above will be justified. Maybe not. “Mr Market” is a manic-depressive. If the newsflow is less positive tomorrow, there may be a lot of selling and the market could crash. There have been very bearish periods — in 2008 for example, the Sensex dropped 65 per cent in eight months. There have also been periods such as January-March 1992 for example, when the index doubled in three months. For what it’s worth, many investors think the current prices are too high. So if there’s a wobble in sentiment or newsflow, there could be a lot of selling.

Should I cash out of the stock market?  
 

No. In the short-term, markets can swing wildly. In the long-term, they go up, assuming the economy is growing. The Indian economy is battered and bruised. But things will eventually get better even if they get worse before they do. Over a 40 year perspective, the Sensex has moved from a base of 100 (1979-80) to 50,000 now. That’s a compounded return of over 16 per cent. Can you think of too many assets that give comparable return over 41 years?

How can I invest safely in the stockmarket?

Don’t park your housekeeping money there. Only invest sums that you can afford to leave alone for several years at a time. If you don’t want the hassle of tracking your investments regularly, pick a mix of index ETFs and diversified mutual funds and invest systematically by putting in small sums every month. That way, expert fund managers are looking after your cash. They make mistakes too but they tend to make fewer mistakes than an individual who has neither the time nor the skill-set to pick stocks and track them continuously while making a living doing something else.