Fundamentals diverse from quarterly results

In March this year when the world suddenly stared at a bleak immediate future due to the spreading pandemic and the voluntary closure of societies to any economic activity, the stock markets reacted abruptly to the impending world productivity contraction and corrected sharply. The news and the extrapolation of the possible impact on the world economy, the picture was everything short of hope. The rapid spread of the virus among the people across the geographies forced the governments to take stance of lives over livelihoods.

Then again, a quarter later, most of the stock markets indices have regained majority of the losses and also witnessed one of the best ever equity market performance in any quarter period in the recorded history. Such was the rapid rise in the stock markets led by technology, biotech, pharma and healthcare sectors, which not just happened to recover the lows, but begun to thrive in the current scenarios. Contrastingly, there were job losses and business closures - many temporary and some permanent, the fundamentals have never been worse, in a few parameters beating even the Great depression but the stock/asset prices are moved opposite to this.

Of course, the credit goes to the governments and the central banks across the geographies managed to pull up a near-coordinated fiscal and monetary stimulus that changed the tide and the extrapolation of our thoughts. The counter narrative was well established to the earlier dreary narration of the imminent future. The stock market participants were not only inundated by the unprecedented liquidity, but also an overwhelming narrative that drove the stock markets. Add to that the millennium investors with their fresh look perspectives, stimulus money and also the ease of investing armed with platforms that provide ease of access/execution at almost nil costs; the recipe is the latest outcomes.

Though, at every interval or at any instance of the stock markets, the narrative or the story around the stock that drives the price up or down. It's wrong to assume that stories are misleading and actually turn important in stock investments. For instance, despite the tougher crisis the Indian economy endured, the great Indian story remained intact and that became the seeds of the initial resilience, be it in 2013 and the 2017 post-demonetization, etc. We humans love to tell and listen to stories that help us pass on the learnings and morals. This ain't any different with stock investing and the narratives built around stocks or sectors.

If we were to express the performance of stock in pure numbers, it wouldn't register in our thoughts. In stock markets, it's not just important that you believe what a stock does, but make others too accept your view.

A classic example is of Tesla in the US stock markets. The company's founder Elon Musk always comes up with thoughts or plans on how to change the world the way we live. While releasing the vital stats of what the company is currently doing, it always paints a picture that arouses an interest of what the future holds of about that company.

Even as the current fundamentals are diverse from the current results, the stock price doesn't matter any further. No, I'm not suggesting to short Telsa. While the US has printed more money in the last one month than in the last two centuries, the entire numbers representing the enormous liquidity infusion, the continued asset purchases by the Fed, the zero interest rates and the falling real yields are no match to the convinced conviction of the narrative of the US Fed's 'whatever it takes' actions to avert an economic collapse is driving the markets.

Also due to the rise of 'intangibles' on the books of the companies, the traditional valuation models are under stress. So, would we ever not consider fundamentals again? Possibly in the near-term, this narrative is strong and intact, the markets could act diversely to the reality. For now don't fight the narrative and participate in it wisely.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)