Fundamentals or FOMO. What’s Behind the Market Rally?

Both Nifty as well as Sensex have grown by 7.57% and 8.23% respectively from November 2019 to November 2020. This rise has been exceptional given the unprecedented times such as the Covid-19 pandemic. Generally, in times of an economic slowdown, the market prices are expected to drop drastically. However, beating all logic. The market has continued to grow vigorously over the past year and more. Before the pandemic, the economical situation in India was more stable in comparison to its condition in the present times. Back then, the forecasted growth was at 7.2% with an inflation rate of 3.6%. Since the lockdown, the GDP reduced by 23.9% in Q1 and 7.5% in Q2.

All of these metrics combined should have logically reduced the valuation of the indices too. However, the trend observed has been the extreme opposite. Such a trend is caused by the increase in the number of investors as well as capital in the stock market. There must be a reason for this increase in inflow of investors. The final question comes down to whether these investors invest in the market based on the fundamentals of the market or FOMO. Let’s dive in and understand FOMO meaning in english and the recent market trends.

What is FOMO?

FOMO stands for “Fear Of Missing Out”. The meaning of FOMO is that, in the course of an arising fear about missing out on an opportunity or a chance, certain actions are performed. For instance, due to the fear of missing out on a good investment opportunity, investors may invest in a particular stock. The concept of FOMO has caused several investors to invest in ways that are not really recommended. In the financial market, FOMO can also be clearly seen when an investor experiences remorse or regret after missing out on a huge rally in the market. Due to this impulsive urge to not miss out on any opportunity, several investors make hasty and impulsive decisions without much thought.

What are Stock Fundamentals?

Almost every investor ensures to check on the fundamentals of a stock. The fundamentals of a particular stock essentially refers to all the data that is related to that stock. Investors would look at this data to understand how the perceived price differs from the actual value of the stock. Gathering such data and analyzing them helps investors make a calculated choice when it comes to making the right investment. Fundamental analysis mainly focuses on a few criteria such as:

  • Cash flow
  • Capital management
  • Return on assets
  • History of profit retention

These factors are analyzed along with several other factors. Investors typically look at the entire industry and the market as a whole along with these criteria of a particular company to further study the said company. Ultimately, the goal is to identify which stocks are correctly priced and which stocks are either overpriced or underpriced. With such deep insight into a stock, it is almost easy to make the right decision.

Is FOMO Driving the Market?

In the present times, the market rally is the buzzing news that is all around the stock market. In March 2020, record low prices were observed. However, since then, the prices of stocks in different sectors have been rising incessantly. Here are some market trends about the prices before Covid-19 and after. These values represent the percentage changes in that particular time period across several indices.

Index Percentage Change
March 24.2020 Jan 14, 2020
Lockdown 1.0 Pre-Covid High
NIFTY 50 100 26
NIFTY 100 101 28
NIFTY 200 106 30
NIFTY 500 110 33
NIFTY NEXT 50 107 34
Nifty Midcap 100 142 52
Nifty SMallcap 100 186 55

Such an increase in the prices of indices has been due to the increase in investment in the shares under each of these indices. This would ultimately mean that the number of investors entering the stock market has risen. An overwhelming majority of investors have a pool of surplus that is available for investments. However, the economic behavior of such investors is not entirely rational. Most of these investors are acting from a place of FOMO and not analysing the required fundamentals of stocks.

According to Atul Suri, the CEO of Marathon Trends – PMS, “We are here for multi-year trends and in the lifetime of any investor if you are able to get one or two such large trends, the wealth creation impact is massive”. He also mentioned that all eyes will be on global liquidity. The ultimate factor that is driving the stock market is the liquidity and not any other factor in large amounts. While there may be a share of FOMO involved with investors, liquidity takes the high stand for the increasing trends as well. In December 2020, Nifty fell by almost 400 points. Meanwhile, FII sold ₹300 Crores worth of shares. This provided an idea that FII flows were ultimately driving the market.

On the other hand, some investors and experts are always under the impression that the markets will indefinitely rise in the long run. All of these economic slowdowns, recessions, and other hindrances are mere hiccups in the journey that cause temporary downfalls in the market. In contrast to the previous recessions, the Covid-19 pandemic caused many people to enter the investing landscape and buy several shares in companies at low prices. This was considered to be an ultimate opportunity to build wealth for many investors. This is a clear explanation for how the equities indices continued to reach new peaks despite the global lockdown and the economic slowdown.

In a Nutshell

During the time of the pandemic, several new and novice investors have entered the stock market. With the economy taking a massive hit, the stock prices reached new lows in March 2020. This was viewed as an investment opportunity by many investors as they expected the market to rise in the future. Such an increase in investment, while being backed with this logic, was also partly moved by FOMO. With a combination of fundamentals as well as FOMO, the stock market continues to hit new highs.