In today’s Finshots, we talk about why the stock markets might just be the most powerful force in the economy and whether that holds true for India markets too.

The Story

Barry Ritholtz, a popular columnist and fund manager, recently dropped a take titled ‘The Stock Market Remains Undefeated.’ And it opens with one big claim:

There have been many winners and losers over the past few months. Perhaps none have been revealed for having furious, unbridled power more than the U.S. equity markets. … Bonds might drive the intellectual debate around policy, but it’s the equity markets that politicians pay closest attention to…

And he backs this up with three iconic moments when the US equity markets threw a tantrum… and the government caved.

2008. During that October, the US Congress initially said no to the Fed’s bailout plans following the Lehman Brothers implosion. The markets collapsed about 13% in a week. Within days, Congress passed the bill, and by November, the markets recovered all those losses.

2020. The pandemic shut the world. US markets plummeted over 30% in just 17 trading days. The US government injected trillions of dollars through the CARES Act (about 10% of US GDP) to support the economy. Markets rebounded about 70% from their March lows and ended 2020 in green, even gaining another 28% in 2021.

2025. Just months back, Trump slapped massive tariffs and markets tanked, while US treasury officials freaked out. And you know what turned up next. Trump pulled back and the markets recovered all losses within five weeks.

So Barry’s point is clear. Equity markets don’t just reflect policy, system changes, or even the economy. They also shape them.

Now, you might say, ‘Sure, that’s America. What about India?’

Let’s take those same time frames and flip the camera.

In 2008, the Sensex crashed from 21,000 to 8,000 levels in months. Foreign institutional investors (FIIs) pulled out billions. The government scrambled with excise cuts and infrastructure pushes. The Reserve Bank of India (RBI), which had been in a tightening mood, slammed the brakes and slashed rates from 9% to 4.75% within 9 months. SEBI activated circuit breakers to protect investors from panic-driven volatility. The government also rolled out stimulus packages like tax reliefs and infra spending. And within a year, by the end of 2009, the market bounced back nearly 80%.

Then we have 2020. While Trump was debating lockdowns, India was already under one. From March to April 2020, the Sensex dropped about 20%. The response was historic. The government rolled out a ₹20 lakh crore stimulus package, which was 10% of India’s GDP at the time. The RBI cut rates to record lows and postponed loan repayments. The Sensex recovered all the losses by November 2020 and went on to see more gains while closing the year.

And lastly, 2025. Not long ago, Indian markets saw a sentiment as well as tariff-driven fall. Valuations were frothy and FIIs pulled out. But this time, there was no massive stimulus or repo rate cut. Still, the system acted to save the markets. SEBI stepped in with tighter surveillance for the F&O markets. FIIs returned once Trump rolled back tariffs, and domestic institutional investors (DIIs) have bought ₹2.3 lakh crore worth of stocks in 2025 so far. Today, the markets are up about 3% since the start of this year.

So yeah, India’s seen its own version of “Mr. Market slaps, the system responds.”

Now, of course, there are exceptions to this.

Take the 2018 IL&FS mess. Yes, the government acted, but much later. By then, non-banking financial companies (NBFCs) had already lost a significant chunk of their value and the recovery was slow as well as painful. Or look at 2021–22’s tech IPO party. Zomato, Paytm, Nykaa. These stocks popped, then flopped. But no major systemic changes showed up.

But these instances weren’t strong enough to bust the broader market trend. However, when lakhs of crores in market capitalisation are on the line, like during Covid, the government races to save the day.

Why?

Because at its core, the market isn’t a machine. It’s a crowd. It’s a story the crowd tells — that the economy will grow, companies will earn more and the future will be better. As long as enough people believe that, the economy grows and the markets rise.

Daniel Kahneman, the Nobel-winning psychologist, didn’t call the stock market a story-generation machine, but he may as well have. In Thinking, Fast and Slow, he explains how we spin coherent stories from limited facts. That’s what markets do. They don’t price what’s objectively true. They price what people believe.

That’s why confidence and perception matter. A mere rumour of a bailout can trigger a rally. And a solid earnings number can tank a stock if the story changes. Markets don’t just react to the economy. They front-run it — pricing in what the next year might look like. In short, they’re forward-looking, crowd-driven, confidence-sensitive pricing mechanisms.

So, when growth suddenly hits the brakes, markets drop like a rock. And because they’re often the first signal of trouble, policymakers look there first when things go south.

Especially in India, where over ₹461 trillion worth of wealth is tied to equities through mutual funds, insurance, retirement schemes, demat accounts and startups — a falling market isn’t just a financial event. It’s a sentiment crisis. People stop spending, businesses stop expanding and foreign investors stop trusting your story. That’s why governments scramble to patch the wound.

In that sense, the market isn’t just an outcome of the economy. It shapes it. When markets rise, people take risks. They spend. They invest. They hire. That belief becomes reality.

So no, markets don’t always go up. But belief? That’s a hard thing to bet against.

And when you’re betting against the crowd’s wisdom, someone usually steps in — the RBI, the finance ministry, the system. Liquidity returns. Confidence rebuilds. And slowly, like clockwork, the market grinds higher. Not because it’s magical. But because economies grow, profits expand, companies keep building and human nature leans toward hope.

Now, this doesn’t mean the market is one big monolith.

There’s a world of difference between what happens to the index and what happens to your portfolio. When the market crashes, large-caps bleed. But mid- and small-caps? They get hit the hardest. The Sensex fell about 60% in 2008 and 40% in 2020. But small-caps dropped even more.

And timing matters too. Say you started investing in 2005 when the Sensex was around 6,000 — and just held through all the chaos. Today, you’d be up 14x. That’s a neat 14% CAGR. But what if you sold before the crash, at the top in December 2007 when Sensex sat at 20,000 levels, and bought back at the bottom of 9,000 levels in December 2008? Your 14x return would’ve turned into over 30x. Add one more move — sell in December 2019 at 41,000 levels, buy in March 2020 post-Covid at 26,000 levels, and that’s over a 50x return!

Same market. Different timing. Different outcomes.

So yeah, buy-and-hold works. But smart rebalancing, risk management and avoiding frothy stocks? That’s what better returns are about. If you only track the broader market and think you’re safe, you might be in for a surprise. Because while the index eventually recovers, not every stock joins the ride.

But however you slice it, Barry’s right.

As he puts it… Hell hath no fury like a market surprised.

In simpler terms — when things don’t go as expected, the market sentiment turns fast. Brutally fast.

And if you’ve tracked Indian equities long enough, you’ve seen that storm up close.

Until then…

Don’t forget to share this story on WhatsApp, LinkedIn and X.

75% of Indians are NOT covered by Life Insurance!

Don’t be a part of the herd — take the first step and lead the way.

A term life insurance plan offers a crucial safety net for your loved ones, ensuring they’ll be financially supported even in your absence.

Book a FREE call with Ditto to learn more about term life insurance and find the best plan for you and your family.