Are we wrong to be so optimistic?

Morgan Stanley predicts that the stock market index, the Sensex will rise by another 9% to reach a record 34,000 by June next year. It has risen 17.14% since January of this year. "Now actually we are close to a situation where the economy will be firing on all cylinders and strong earnings growth will come through," said Jonathan Garner. Others are not so bullish. "Earnings revision momentum is still negative (more downgrades than upgrades) and Nifty (fiscal) 2018 earnings growth expectations stand at 15% vs 18% at the start of the earnings season," said a note from Citigroup. Mobis Philipose gives examples of shares whose values have soared despite earnings remaining flat. Earning per share of ACC has fallen by 55% since 2013 but the price of shares has risen by 40%. Shares of Ultratech Cement have risen by 120% although earnings have remained flat. Nestle is valued at 67 times its earnings. Foreign funds, with $40 billion in assets, have got returns of 25%, wrote Andy Mukherjee. Indian funds, with investments of $79 billion, have done even better, generating 27% returns. There is $60 billion of excess liquidity in banks and foreign investors have brought in $7.8 billion this year. There is hardly any volatility in the Indian market. Not just India. "Of all the dangers in the world of finance, the enduring low level of market volatility is the most significant," wrote Dean Curnutt. How low is volatility? The level of realized volatility of the S&P 500 in the US has dropped to 6.7% which is lower than before the financial crisis of 2008-09. Surely a calm stock market is better than one that is jumping up and down? The danger comes from irrational behavior of individual investors. People suffer from 'availability bias', which means an expectation of recent events repeating themselves, and have an aversion to making losses, more than the joy of making profits, wrote Prof Cass Sunstein. When markets are rising investors start buying, thinking that they will go on rising infinitely, and when they fall they sell shares in a panic, incurring heavy losses. Some people worry that individuals who are rushing into this overvalued market are going to get badly hurt. Why? A Reserve Bank survey showed that people are worried about jobs. That is because private sector investment has fallen. Naturally, demand for electricity is not rising as expected, so that 25 gigawatts of coal fired plants are lying idle, even while 50 million households remain in the dark. Indian consumers are the most optimistic about 'well being' in Asia. So they ignore everything and buy stocks. Cute.