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Stock Market All Time Highs: Are They Even Significant?

August 1, 2016

 

 

Stock Market all-time highs are often hailed by the media as a landmark event, indicating that the market and hence the economy on the whole is going towards a development like never before. However in reality, these highs are norms and not something extraordinary. For example, between May 2004 and Mar 2008 market created almost 257 new all-time highs in 1186 trading sessions! Was this something extraordinary? Did it happen for this first time in the history? The answers to these questions is a ‘No’ because these 257 all-time highs are not something out of the blue but rather a normal phenomenon. Let us see why:

 

This misconception about all-time highs can be explained by understanding how these all-time highs are actually attained. As one might be aware of the fact that SENSEX is a weighted index which is calculated by market capitalization of each of the 30 companies comprising the index found by multiplying the price of their stocks with the number of shares issued by that company. As an economy grows, it is expected that the markets of the companies would expand and as a result, their profits and value reflected in the capitalization grows (which is not something strange but rather the norm) leading to new highs.

 

 

Many times, these new all time highs are deemed to be an indication of an overvaluation of the market. But this is a misconception because over time an index needs to increase if an economy needs to grow; this can be explained from time-proven economic theories. Any investor or even an informed citizen is well aware of the fact that India is a growing economy; so it is expected that its market index needs to increase coinciding with the GDP growth. As GDP would grow, the market hold of many strong players would increase and as a result the market strengthens. New all-time highs are going to occur naturally due to this process because if that is not the case then we cannot say our country is growing, rather it is remaining stagnant, which is not something we would want. Hence, these bring us to the conclusion that hailing new all-time highs as something suspicious (or even good for that regard) is not right. One needs to analyse the markets carefully to understand why it happened and accept that the next day, another new all-time high may well be on the cards.

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