Quest for higher return - stock market

Since time immemorial most of the kings or emperors wanted to increase their power and area of influence. This led to small battles or full fledged wars to loot or to acquire the territory of neighbors and forcibly takeover their livestock or wealth etc. War has always been costly affair and for that kings had to increase the taxes on its citizen which used to deteriorate the living standard of common man and people living in extreme poverty leading to discontent.

 

Moving to 16th and 17th century, new class of Europeans merchants started trading with distant countries which were not sharing border with them. There were trade routes between Europe and Americas & Asia and to increase their profits they planned to control the produce in other continents which required military power and money to fund those military expedition. Rich people in Europe funded these but not through taxes but they gave it voluntary in lieu of profits. Companies like East India Company were part of this change. People started investing in these companies and started to own piece which were represented by share. Need arose to have a central place where one can monetize and handover ones share which led to starting the exchange where the shares for these companies were traded. Share price of the companies fluctuated as per financials earning of the company. 

 

Even though the exchanges evolved and have become technologically advanced, trading on these exchanges have much more sophisticated and complete new industry of mutual funds, trading houses haves emerged but looking at the value of the company and finding the worth of a company became an art and some like Warren Buffet, George Soros etc. have mastered this art and have made money. This is absolutely fine but issue happens when stock markets moves away from fundamentals due to various reasons we see big fluctuations like 1999-2000 dot com bubble.  

 

In March 2020 after China when news for corona virus started to come Europe and one after another countries started to go into lock down and commercial activities ceases to exist then world started to understand the impact the virus can have on the economies of the world and the stock market started to drop by leaps and bounds and it hit the bottom in last week of march. Recovery in the stock market started then and after 4 months now, at end of July 2020, most of the indexes across the world are trading same value or higher than they were before the virus had hit. When stock hit the bottom, cases averaged 30000/day and now it is about 300,000/day, 10 times, and we don't have any sight when this pandemic will end and economies are still in recession and quantum of decrease of GDP is not yet known and companies's profit and revenue are still falling but stock markets continue to increase. What is happening? Why there is disconnect between real GDP or its growth and stock market?

 

Looking at the stock index stats dividend yield has dropped from >2% in early 2000s to close to 1% now and similarly stock PE have increased from mid teens to >20 during this time frame.  Couple of  phenomenons are happening 

·        Stocks rises quickly if  hyper growth is expected in coming years. Looking in past few years it doesn't seems so. Indian GDP growth rate is dropping quarter or quarter for past few years yet stock indexes are touching new heights. Why it is going up? Looking at the index, it looks like worth of money is much less than it was decades back and the reason for that is the US fed and other central banks who have reduced the interests to almost zero. When recession comes fed prints money to come out of it and they build other bubble and if there is any squeeze on excess liquidity then the new bubble bursts & fed prints even more money to come out it and this cycle goes on. In 1987 Alan Greenspan, US fed chairman,  started reducing the the interest rates that led to dot com bubble when tons of money moved to stocks, then housing bubble burst in 2008 when cheap money moved into real estate. US continued to keep reducing the interest rates and probably other bubble would have burst when Corona virus came. What US did, spent 2.5 trillion to save economy and gave helicopter money which is going back into the stock market instead of making real assets. Isn't this a ponzy scheme at highest level which quite troublesome. 

·        By 2019 end there were 4 million demat accounts in total and in 2020, 900,000 new demat accounts were created in India i.e. a jump of 22%+ more investors that came in and along with the the average age of investors is also dropping. These new investors are young who have just started earning and parking the extra money in stocks. Most of them have read Warren Buffet's comment, "Be fearful when everyone is greedy and get greedy when everyone is fearful". It seems that people have taken this suggestion to their heart and started pumping the money in stock market when it started to drop. Since stock market is going higher, who have invested earlier are sitting on profits but will it continue. How they will behave if there is 2nd dip?

 From 1960s till 80s Japan economy was growing at fast pace it was being speculated whether and when Japan will overtake US as the largest economy and in beginning of 90s it started to falter and lost completely and next decade was marked as "lost decade". Debt taken by a person or company or country is like borrowing from future generation which has to be repaid sooner or later. Now the question is not if but when the US FED and other central banks will roll back the easing they have been doing for decades, as they have to do that what will happen not only stock market but every aspect of human life. In light of this, are we going to observe the similar "lost decades" in stock market and in life?