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Easy money = higher stocks? Think again

It seems intuitively obvious that easy money would find its way into stocks, but evidence on the ground is too thin

Topics
stock market rally | stock market trading | Bull Market

Debashis Basu 



Debashis Basu

Last fortnight I wrote people are so awed by market behaviour in 2020 after the shock of Covid that even with the benefit of hindsight they are unable to find reasons to explain what could have driven the markets relentlessly and to such great heights. The most common explanation for stock price movements is earnings growth (“stocks are slaves of earnings”). As long as earnings growth is assured, stocks will move higher. If a company delivers much higher growth than expected, the stock would jerk upwards in what is called an “earnings surprise”. This was certainly not the case in late May, when the markets took off. Earnings were not only far from being assured but the outlook was decidedly gloomy. And anyone mentioning the term “earnings surprise” would have been considered mad. It is worth noting this because we tend to forget our opi­nions, even about the recent past, and rationalise the eventual outcomes (“I knew it”, or “it was expected”).

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First Published: Sun, January 17 2021. 23:13 IST

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