The stock market’s sudden rally from the lows in March after lockdown was announced has left many professional investors scratching their heads. Their response has been to dismiss this“recovery” as a blind rally powered by “dumb money”, the irrational exuberance of ignorant retail traders, who, bereft of avenues to spend or invest, are gambling away their extra cash through zero-cost brokers. And this is not just a trend in India.
The US, UK, South Africa,Malaysia, Pakistan and even Iran have seen their stock markets rally.The term, irrational exuberance, coined by Alan Greenspan in 1996 and popularised by Nobel winning economist Robert Shiller, is used to explain a situation where economic agents develop misplaced confidence in the economy and financial markets. It is one of the hypotheses being used to explain the apparent disconnect between the stock market rally and India’s nosediving GDP. In this piece, we try to find evidence to support this hypothesis