Beware market's optimism bias

It's a new year and there are new hopes.

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Will 2024 bring new highs for the stock markets? Towards the fag end of December, key benchmark indices, the Nifty50 and S&P BSE Sensex, scaled new peaks. This was driven by positive domestic as well as global news flow.

For one, Reserve Bank of India raised its gross domestic product growth forecast for FY2024 to 7% from 6.5% after September-quarter (Q2FY24) growth came in better than expected. Anticipation of interest rate cuts by the US Federal Reserve also fuelled sentiments. As such, liquidity influx by both domestic and foreign institutional investors into Indian stocks has been robust.

Amid the optimism, the fear gauge or the NSE volatility index (VIX) has risen by 36% in the last six months. Theoretically, the movements in VIX and benchmark indices are inversely related. Simply put, this means that the Street is currently fixated on positives, turning a blind eye towards potential threats.