{"id":17066,"date":"2019-11-14T11:17:35","date_gmt":"2019-11-14T05:47:35","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=17066"},"modified":"2019-12-03T16:23:51","modified_gmt":"2019-12-03T10:53:51","slug":"equity-markets-near-all-time-high-but-why-did-little-albert-cry","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/research-desk\/equity-markets-near-all-time-high-but-why-did-little-albert-cry\/17066","title":{"rendered":"Equity Markets near an all-time high. But why did Little Albert cry?"},"content":{"rendered":"<h4><b>Pavlov\u2019s Dogs:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">In the 1980\u2019s Russian psychologist, Ivan Pavlov was researching salivation in dogs in response to being fed. He predicted that the dogs would salivate in response to the food placed in front of them. <\/span><span style=\"font-weight: 400;\">But to his surprise, he noticed that his dogs began to salivate whenever they heard the footsteps of his assistant who was bringing them the food.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Surprised by the observation, he designed an experiment where he rang a bell just before giving food to the dog. He repeated this several times and found that the dog had started to salivate at the sound of the bell.\u00a0 In fact, when he just rang the bell without giving them food, they still salivated.<\/span> <span style=\"font-weight: 400;\">The dog had learned to associate the bell with food.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is called Classical Conditioning, where a neutral event such as ringing a bell (Neutral Stimulus) could be associated with another event that followed i.e. getting fed (Unconditioned Stimulus).<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17067\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732.jpg\" alt=\"Classical conditioning\" width=\"2500\" height=\"2500\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732.jpg 2500w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732-150x150.jpg 150w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732-300x300.jpg 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732-768x768.jpg 768w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732-1024x1024.jpg 1024w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/shutterstock_1535675732-80x80.jpg 80w\" sizes=\"(max-width: 2500px) 100vw, 2500px\" \/><\/a>\n<p><span style=\"font-weight: 400;\">Now if you thought, this response only happens for dogs, here comes the shocker &#8211; this works for humans as well!<\/span><\/p>\n<h4><b>Why did Little Albert cry?<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Another researcher, John Watson, was interested in taking Pavlov&#8217;s research further to show that emotional reactions could be classically conditioned in humans as well.<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/Albert-and-rabbit-1024x718-e1422507447605.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17068\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/Albert-and-rabbit-1024x718-e1422507447605.jpg\" alt=\"Little albert\" width=\"480\" height=\"337\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/Albert-and-rabbit-1024x718-e1422507447605.jpg 480w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/Albert-and-rabbit-1024x718-e1422507447605-300x211.jpg 300w\" sizes=\"(max-width: 480px) 100vw, 480px\" \/><\/a>\n<p><em>Source:\u00a0<a href=\"https:\/\/commons.wikimedia.org\/wiki\/File:Little_Albert_experiment_(1920).webm\" target=\"_blank\" rel=\"noopener\">https:\/\/commons.wikimedia.org\/wiki\/File:Little_Albert_experiment_(1920).webm<\/a>\u00a0<\/em><\/p>\n<p><span style=\"font-weight: 400;\">He took a 9-month-old child, whom he called \u201cAlbert\u201d for his experiment. He exposed the child to different elements like a white rat, a rabbit, a monkey, masks, burning newspapers, etc.\u00a0 The child initially reacted with curiosity and no signs of fear.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">He then started to create a loud noise behind the baby by pounding on a steel bar with a hammer on several separate occasions while showing Albert the rat. Albert cried in reaction to the noise and, after a few repetitions of the experiments, started to cry in response to the rat even without the loud noise. Other objects, when paired with the noise, also triggered the same fear response.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Little Albert experiment is an example of how classical conditioning can be used to condition an emotional response in humans.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Neutral Stimulus:<\/b><span style=\"font-weight: 400;\"> The white rat<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Unconditioned Stimulus<\/b><b>:<\/b><span style=\"font-weight: 400;\"> The loud noise<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Unconditioned Response<\/b><b>: <\/b><span style=\"font-weight: 400;\">Fear<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Conditioned Stimulus<\/b><b>:<\/b><span style=\"font-weight: 400;\"> The white rat<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Conditioned Response<\/b><b>:<\/b> Fear<\/li>\n<\/ul>\n<h4><b>Now, what does this have to do with investing?<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Let us take a look at what happened when NIFTY reached its all-time high in recent times.<\/span><\/p>\n<p><b>On Aug 28, 2018 &#8211; Nifty reaches an all-time high of 11,739.\u00a0<\/b><span style=\"font-weight: 400;\">What happened after that?<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/1.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17069\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/1.png\" alt=\"Equity Markets near all-time high\" width=\"356\" height=\"277\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/1.png 356w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/1-300x233.png 300w\" sizes=\"(max-width: 356px) 100vw, 356px\" \/><\/a>\n<p><b>On June 03, 2019 &#8211; Nifty again reaches an all-time high of 12,089.\u00a0<\/b><span style=\"font-weight: 400;\">What happened after that?<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/2.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17070\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/2.png\" alt=\"Equity Markets near all-time high\" width=\"618\" height=\"262\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/2.png 618w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/2-300x127.png 300w\" sizes=\"(max-width: 618px) 100vw, 618px\" \/><\/a>\n<h4><b>What is happening in the market now?<\/b><\/h4>\n<p>The Nifty has again reached close to its earlier all-time high levels!<\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/3.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17071\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/3.png\" alt=\"Equity Markets near all-time high\" width=\"619\" height=\"262\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/3.png 619w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/3-300x127.png 300w\" sizes=\"(max-width: 619px) 100vw, 619px\" \/><\/a>\n<h4><b>What do you think will happen?<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">If you immediately responded,<\/span><b> \u201cIt should fall\u201d<\/b><span style=\"font-weight: 400;\">, welcome to the club.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">We just got PAVLOVED by the markets!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Just like how Watson had conditioned Little Albert to fear at the sight of the rat instead of actual loud sound, the market has conditioned us to fear a \u201cmarket high\u201d instead of the actual market fall due to the previous two instances of market highs accompanying a market fall.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Neutral Stimulus:<\/b><span style=\"font-weight: 400;\"> All-time high<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Unconditioned Stimulus<\/b><b>: <\/b><span style=\"font-weight: 400;\">Market Fall<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Unconditioned Response<\/b><b>: <\/b><span style=\"font-weight: 400;\">Fear<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Conditioned Stimulus<\/b><b>: <\/b><span style=\"font-weight: 400;\">All-time high<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Conditioned Response<\/b><b>: <\/b><span style=\"font-weight: 400;\">Fear<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">But, before you panic and sell out of equities, let us look at what happened the last time markets &#8220;pavloved&#8221; us.<\/span><\/p>\n<h4><b>2008 and 2011 &#8211; All-time highs<\/b><\/h4>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/4.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17072\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/4.png\" alt=\"Equity Markets near all-time high\" width=\"615\" height=\"205\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/4.png 615w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/4-300x100.png 300w\" sizes=\"(max-width: 615px) 100vw, 615px\" \/><\/a>\n<p><span style=\"font-weight: 400;\">As seen above, the equity markets declined in 2008 and 2011 after reaching their all-time high levels at that juncture.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Again in 2014, the market hit all-time high levels, and a lot of us were already scarred by what happened the last two times. We were \u201cpavloved\u201d into associating all-time highs with the fear of declines.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A look at the below chart and you know the rest of the story!<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/5.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17073\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/5.png\" alt=\"Equity Markets near all-time high\" width=\"631\" height=\"204\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/5.png 631w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/5-300x97.png 300w\" sizes=\"(max-width: 631px) 100vw, 631px\" \/><\/a>\n<p><span style=\"font-weight: 400;\">Now that you have realized how the market messes up with our emotions, let us put our logical lens to approach \u201call-time highs\u201d.<\/span><\/p>\n<h4><b>Reframe \u201cAll-time highs\u201d in the right perspective:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Zoom out a bit and take the long term perspective.<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/6.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17074\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/6.png\" alt=\"Equity Markets near all-time high\" width=\"613\" height=\"295\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/6.png 613w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/6-300x144.png 300w\" sizes=\"(max-width: 613px) 100vw, 613px\" \/><\/a>\n<p><span style=\"font-weight: 400;\">As seen above, in the long run, Indian equity markets have tracked earnings growth and have grown at <\/span><strong>14<\/strong><span style=\"font-weight: 400;\"><strong>%<\/strong> CAGR.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">If we expect markets to provide higher returns beating inflation and go up over the long run, it is only natural that there will be several all-time highs during the journey.<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/7.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17075\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/7.png\" alt=\"\" width=\"624\" height=\"257\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/7.png 624w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/7-300x124.png 300w\" sizes=\"(max-width: 624px) 100vw, 624px\" \/><\/a>\n<p><span style=\"font-weight: 400;\">Just like how in gold and real estate we don\u2019t give too much of an importance to all-time highs and brush it off as \u201canyway, in the long run, it will go up&#8221;, we need to start considering \u201call-time highs\u201d as a normal and regular part of long term markets.<\/span><\/p>\n<h4><b>All-time highs don\u2019t mean that markets will fall immediately:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Now while we anecdotally saw how the market tricked us the last time in 2013, let us check for some actual evidence on how the market has behaved after an \u201call-time high\u201d.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For the last 15 years, we took out all the month-end dates of Nifty TRI index where it had hit an \u201call-time high\u201d level. We then checked for the 1-year and 3-year returns following those \u201call-time high\u201d levels. <\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/8.png\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17076\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/8.png\" alt=\"Table\" width=\"368\" height=\"103\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/8.png 368w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2019\/11\/8-300x84.png 300w\" sizes=\"(max-width: 368px) 100vw, 368px\" \/><\/a>\n<p><span style=\"font-weight: 400;\">As seen above, the Nifty gave positive returns 75% of the time on a 1-year basis and 88% of the time on a 3-year basis. In fact, more than half of the instances were followed by 1-year returns of more than 15%!<\/span><\/p>\n<p><b>So this clearly shows that \u201call-time highs\u201d automatically don\u2019t imply a market fall and in fact, majority of the times, market returns have been positive post an all-time high.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Now comes the most important question.\u00a0<\/span><\/p>\n<p><b>Ok. You understand that all-time highs don\u2019t mean an immediate market fall. <\/b><b>But still, you are feeling uncomfortable and would want to know as to what will happen to the markets over the short term?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The honest answer is we cannot predict. Nor does anyone else. But we take the humble \u201cprobabilities\u201d approach over a prediction approach.<\/span><\/p>\n<p><b>Based on history we know that the Nifty over a 6 month period, 95% of the times has provided returns which fall between the range of -27% to +61%.<\/b><span style=\"font-weight: 400;\"> Now to tell where it will fall in this range is impossible, but the takeaway for us is that this should be considered as \u201cnormal\u201d behaviour from the equity markets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The extreme events representing the remaining 5% of outcomes cannot be quantified. However, just to set a realistic context,\u00a0 the last time there was a crisis in 2008, the Nifty had fallen up to -60%.\u00a0\u00a0<\/span><\/p>\n<h4><b>But what if this is the start of a severe crash?<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Now while there is no precise way to predict the markets, however, it pays to be aware of where we are in the cycle. Equity markets go through 4 parts of a cycle &#8211; Bull, Bubble, Bear, and Deep Value. <\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><b>The risk of a severe crash is pretty high when the markets enter the \u201cBubble\u201d zone.<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So while not a precise science, based on the past study of bubbles, usually a <\/span><b>bubble zone is characterised by extreme valuations, strong corporate earnings, very high past returns, euphoric sentiments (a particular theme receiving high inflows, increased demand for IPOs etc), high inflows from both FIIs and DIIs.<\/b><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">When we evaluated the above parameters, the usual signs of a bubble are missing. Hence, we believe that we are still in the bull phase and are yet to reach the bubble phase. So the probability of a sudden severe crash in our view remains very low. (Obviously, the corollary being there is always a minuscule chance)<\/span><\/p>\n<h4><b>The focus should shift from \u201cAll-time highs\u201d to Earnings growth and Valuations:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">As seen above, all-time highs are nothing to panic about and the real attention should be on monitoring valuations, sentiments and earnings growth to evaluate where we are in the cycle.<\/span><\/p>\n<h4><b>Summing it up<\/b><\/h4>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Just like how Watson had conditioned Little Albert to fear at the sight of a rat instead of the actual loud noise, the market has conditioned us to fear the sight of a \u201cmarket high\u201d instead of the actual fall<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The key is to remember that, as seen in past instances \u201cAll-time highs\u201d don\u2019t automatically mean immediate correction &#8211; in fact, 75% of the times, the 1-year returns post a market all-time high has been positive<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">All-time highs are a normal part of long-term equity growth<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The focus should remain on valuations, sentiments and underlying earnings growth instead of \u201cAll-time highs\u201d<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Currently, we are still not in the \u201cBubble\u201d part of the cycle for equities<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Continue with a positive stance on equities and stick to your investment plan<\/span><\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"<p>Pavlov\u2019s Dogs: In the 1980\u2019s Russian psychologist, Ivan Pavlov was researching salivation in dogs in response to being fed. He predicted that the dogs would salivate in response to the food placed in front of them. But to his surprise, he noticed that his dogs began to salivate whenever they heard the footsteps of his [&hellip;]<\/p>\n","protected":false},"author":37,"featured_media":17083,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[411,506,509],"tags":[200,108,517,587,289,516,67,518,338,286,263],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v17.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Equity Markets near an all-time high. But why did Little Albert cry?<\/title>\n<meta name=\"description\" content=\"Equity Markets near all-time high. But that doesn\u2019t imply a fall. 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