»The Daily Reckoning by Bill Borner

When Markets Conflict with Sentiment
31 MARCH 2012

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Most of the time, whenever we read the financial press, we get a negative sentiment. Whether it's the Eurozone debt crisis abroad, or the slowing growth here at home, it seems like things are simply getting worse. On top of that, new corruption scandals seem to emerge with alarming regularity, further compounding the bad news.

If you ask most people, they will probably agree with the statement, that we are worse off now than we were last year. Naturally, we would expect that stock markets should have performed poor over the three months since the start of the year. After all, the markets respond to the news, and the news is clearly negative.

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Instead, the exact opposite has occurred. The Nifty index has had one of its best quarters for a long time. The market is up 12% in the last three months, which translates into an annualized gain of 48%, which is incredible. Of course, no one is expecting the market to be up 48% by the end of the year, but 12% in three months is still fantastic.

It isn't just the Indian market that has done well. Markets around the world have performed well. For example, the S&P 500 in the US is also up by around 12% in the first quarter of this year. It seems like the negative sentiment we get in the financial press is not reflected in the performance of financial markets.

So what is going on here? It can be one of two options. In the first scenario, the markets are irrationally going upwards and ignoring all the negative news. At some point, the fundamentals will catch up to the market and we will have a crash. In the second scenario, maybe we are too pessimistic. Maybe things aren't as bad as everyone makes it out to be, and the markets have every reason to rise.

Put it this way. Currently we have growth at around the 6% level. This is still good, even though it is not as high as it was before. We have repeated corruption scandals, high interest rates, high inflation, and a government that doesn't do much at all. Despite all these problems, the economy can grow at a fairly impressive 6% rate.

If the economy can grow at 6% while all these issues exist, imagine how much better it could do if these problems are tackled and reduced. Of course they cannot be eliminated completely in a short space of time, but there is considerable scope for improvement. When we look at it this way, there is no reason not to be optimistic. Maybe the markets are seeing this, while the financial presshas got it wrong.

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