That time of the year is here again. The time when the festive spirit covers the entire country. In the economic jargon, the consumption and investment boost during these times. And this phenomenon is true all across the world – where in the consumer sentiment is a critical factor driving the economy. And consumer sentiment is in turn driven by several factors – a major one being cultural beliefs and festivities. The multiplier effect of the festivals is huge. Around this time of the year, sales of textiles, automobiles, consumer durables, electronic goods, jewellery, real estate and food picks up.
Even the unorganized sector benefits substantially. Artisans, who mostly reside in rural areas, see significant growth in their sales with greater employment as a cascading effect, owing to increased emphasis on sustainable consumption. The economic importance of the festive season lies in the fact that consumers tend to spend more during this period, with several upgrading their products. This expected consumption boom leads to an increase in industrial activity and investments, while also increasing employment across the nation.
However, that time this year may be different than ever before. With the pandemic engulfing a major part of year already, the upcoming festivities seem to be the last ray of hope for the economy. Businesses are optimistic that the season may see a revival for the sales and put behind the demons of the pandemic. The current season is likely to be bumper for the e-retailers much more than the traditional stores. The youth of New India enthusiastically increase online sales as e-commerce giants like Amazon, Flipkart, Jiomart give heavy discounts this season to boost sales. While markets haven’t been performing too well in the recent past, nonetheless, investors are still hopeful. Diwali is closely attached to stock markets and Dhanteras for gold investments.
People tend to invest on these auspicious occasions with the thought that the investment will multiply our wealth in many folds. Both Indian exchanges, NSE and BSE open the trading window for about an hour on the eve of Diwali and term it as ‘Muhurat Trading’. It is considered auspicious to invest on this day.
Market folklore is abundant with the discussion on systematic pattern observed by the stock market during this time. This tendency of financial assets returns, inconsistent with maintained theories of asset-pricing behaviour is popularly known as the calendar anomaly or the seasonality effect. Since the level market efficiency varies from market to market, the nature and strength of the anomalies are different too. Globally, most common calendar anomaly is the January effect, which illustrates higher expected returns in the month of January than the rest of the year.
This outcome of Diwali in India is a corollary of the Christmas effect in USA or the Ramdan effect in Middle East countries or the Spring Festival effect in China or ‘Dekansho-bushi’ effect in Japan which illustrates higher expected returns during these festivals.
Understanding of the reasons behind this seasonality or anomaly offer the investors the chances to earn extraordinary returns. Misattribution bias provides support to this argument. It refers to the tendency of a decision maker to misattribute her/his mood to the financial decision making. This implies that the same situation can be assessed differently in different moods.
Increased liquidity comes into play for the investors with their annual bonus and accumulated savings boosting consumer demand and hence the industrial production, and induced a positive mindset for the investors in the stock market. Interestingly, Chen and Chien (2011) affirm that the increased liquidity makes the investors less risk averse.
The economic scenario in the forthcoming months of 2020 is expected to fare better than the rest of the year on account of lower prices in the prior month, used as a base for calculating returns. The investor’s exuberance may not be the same as the previous year. But amidst these difficult times, there still would be some silver lining. Intelligent trades can be executed to make good returns this season. Investors can take advantage of conditions in the event of market anomalies to gain abnormal returns on investments.
So dear readers and investors, it is time to cash in the upcoming calendar effect with prudent analysis and cautious planning. This Diwali amavasya, lets gets ready to dance in the dark!
Dr. Tarunika Jain Agrawal