Question

Is the recent rally of the us stock market a speculative bubble? or is it reflection of all available market info?(efficient market hypothesis)

Answer 1

The Corona Virus Pandemic has hit the US economy hard, limiting purchases for consumers and establishments remaining shut has meant that the aggregate or total demand for goods and services is going down sharply on one hand, and on the other producers are making significant losses over the months because of which unemployment in the economy is rising rapidly.

The Efficient Market Hypothesis believes that the stock market has all information readily available and that that shares trade at their actual value representing the nature of the firm itself and the profits it may earn in the future. It prescribes that one can purchase undervalued shares and earn significant money from them as they are valued appropriately and can sell when the price increases.

In real life however, the market prices are decided by demand and supply of shares much more than the information available. Recent trends have indicated, that a large number of people today, have opened up share trading accounts primarily during the recent lock down. This has created a surge in demand for shares in the market place.

Like any other economic good, shares increase in value when there is excessive demand for the same and supply remains constant. This is the core reason for the price rise in the share market despite the fact that firms are making significant losses due to the pandemic situation.

Thus, we can conclude by saying that the efficient market hypothesis in this case does not hold true and the prices of shares are rising simply because of the additional demand which has been created and people are speculating much more than normal days. It is right to call it a speculation bubble than informative purchasing.

Please feel free to ask your doubts in the comments section if any.