Started in 1986, the S&P BSE SENSEX is calculated on the basis of “free-float market capitalization” methodology of 30 companies with different weights for the constituent companies.
In Feb 2020, as in the case of S&P 500 and other major indices, S&P began its downfall. From around 42,000, it plunged to about mid 25,000 on 23rd March. It fell 10%(touched lower-circuit) 2 times in March on 13th and 23rd – as a result trading was stopped for 45 minutes. It was due to severe selling by Foreign Institutional Investors and the action on 23rd was particularly due to the government announcing its first lockdown, it fell 13% on that single day!
Circuit breakers show the limit beyond which if a stock moves, it would be halted for some time to avoid panic selling and let the markets correct itself. The upper and lower circuits are placed by the Stock Exchanges.
The fall in March was about 25%, from 38,297 on Feb 28 to 28,440 on March 30. This was unprecedented. Fast-forward 10 months and it touched 50,000 on Jan 21 2021. From its lowest in March, this shows an 87% increase. This makes it the second best performing index globally after NASDAQ- which is a technology heavy index; saw 92% rise.
The reasons for this rise are: –
- Record low-interest rates post pandemic around the world – which led to increase in money supply and thus greater inflow of investments by Foreign Institutional Investors.
- Stimulus induced liquidity.
- Better than expected recovery in earnings by companies after taking a hit for the first 2 quarters.
- Hopes of vaccines and a life “back-to-normal”.
- US President Joe Biden’s swearing in – optimism rose over his administration’s support to the US economy, which inturn is expected to boost the world markets.
“The Nov. 12-24 Reuters poll of over 35 equity strategists predicted the BSE Sensex index, which is currently trading at a record high, would set new all-time peaks in the next year. It was forecast to rise about 3% from Tuesday’s high to 45,750 by mid-2021.
It was then predicted to rise another 4% to 47,550 by the end of 2021,..”quoting EconomicTimes.
The above quote now just seems trivial. We have already beat 50,000 by mid January let alone mid 2021. But in hindsight, it would have made sense back then!