Markets and expectations

The stock market behavior currently is a classic text book case for understanding the expectation discounting in markets. The markets went up from 6900 nifty to 8700 in the hope of first Monsoon being normal, GST passing and corporate earnings growth.

The corporate earnings growth was not as expected, however the other two hopes have been met. The Nifty fell by over 100 points on the day GST was passed.

Next two days we saw a fall in market since the market did not have a story to look forward to.

The new story in the market today is Reserve Bank Governor would lower the interest rates since the government has fixed the target inflation for next 5 years at 4%. As RBI prefers low inflation, this target is likely to enthuse RBI to lower the interest rates.
The learning here is that the markets always discount in advance the events that are forth coming. It lifts itself to the levels assuming the event has already happened,

If the event fails to happen then the market goes down drastically but if it does occur there is some fall. This fall is due to the fact that the investors who had bought in anticipation of the event exit the market booking their profit/ loss and wait for the next story.
There is a popular saying “The market always knows”. There is no news which is not in the market already be it the development in a company or government or any other external factors.
Inside information is available all over if you are vigilant enough to read the trends. Government budgets are also often leaked.
There are large numbers of analysts who continuously study the events and impact on prices; their actions are influencing the prices. It is only certain unexpected natural events such as earth quakes, Tsunamis or natural disasters which lead to economic losses and which are not factored by the markets.
Hope the observations above helps you understand the markets better and you can profit from the same

Happy Investing….

Deena Mehta

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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