How sensitive is the stock market?

The vicissitudes of the stock market movements are now quite legendary. These idiosyncratic movements were also termed as 'irrational exuberance' when the IT bubble built up, and then true to the aphorism, burst.

Not a long time back, the Sensex scaled new heights even as Mumbai city was drowned under the floods. This seems out of place considering that a flood of this magnitude witnessed could cost the country over Rs 20,000 crore (Rs 200 billion) with a number of industries being directly affected by the close down of the city for six days.

But the trading terminals continued to exude relentless enthusiasm. This begs the question: How sensitive is the stock market to externalities?

Today, it is generally accepted that economic fundamentals may not mean much to the market; and even a good economic performance does not excite the players. A change of guard on Parliament Street meant more for the market than a robust economic performance.

Similarly, the spiralling crude oil prices have not dented the enthusiasm even as economists debate the severity of its impact on the Indian economy. And this is true not just in India but all over the world, too.

The objective here is to see as to how the Sensex -- which is taken to be the barometer of the stock market -- has reacted to non-economic phenomena such as deaths, riots and natural calamities.

The purpose, hence, is to judge market behaviour immediately after a serious incident has occurred. This will also capture the turnaround time for a recovery in the Sensex, that is, how long does the shock reaction last, if at all?

Stock prices have become less sensitive to natural catastrophes. Thus, while the Orissa cyclone and Gujarat earthquakes did cause a fall in the Sensex, the tsunami and Mumbai floods actually saw the Sensex rise.

Whenever conventional wisdom suggests that stock markets should be negatively affected, especially when the city of Mumbai was involved, a contrary picture was observed.

Take the instances of the Mumbai blasts of 1993, or those in 2003, or the floods of 2005. The Sensex actually rose even though Mumbai and its people were affected directly by these incidents.

In fact, in 1993, the BSE was subjected to a terrorist attack, where brokers were personally affected. But this did not daunt the Mumbai spirit. Or is this justification of 'resilience or spirit of Mumbai', a euphemism for the irrationality on the bourses?

Political disturbances such as a PM being killed or an attack on the Parliament is serious business. Or for that matter the nuclear explosion and the negative response from the west did impact stock prices.

The Ayodhya demolition was really "nothing of value" for the country except probably for being an emotional assault on history. But, the Sensex fell for the longest period of four sessions before turning around.

Stock prices also reacted positively to international battles such as the attack on Iraq in 2003, or the emancipation of Kuwait in 1991. An effect of globalisation?

The turnaround time is again quite remarkable. With the exception of the Ayodhya demolition, the Sensex appears to swing back in the upwards direction within a day. This indicates that while the markets are stunned by a reversal, they recover with alacrity to be "back-to-business".

The Indian bourses have, hence, grown to take only momentary notice of contemporary developments and continue to be guided by the animal spirits which have characterised stock markets all over the world. The interesting part of such behaviour is the short turnaround time of a day.

Typically where the magnitude of the damage caused by a natural phenomenon that is affecting industry is large and increases as the assessment is completed, one would expect the impact to sink in. But, that does not happen and the exuberance carries on.

It was not surprising that when the tsunami struck, the infrastructure sector including steel and cement were counting their brownie points as the cost of reconstruction got reflected in the higher share prices.

This may be considered a victory of wealth over humanism -- a capitalist trait which always looks towards the generation of further wealth from destruction.

The writer is chief economist, NCDEX Limited.