The performance of a stock exchange is typically seen as one of the leading indicators of economic growth in a country.The KSE-100 index is the prime parameter to judge the performance of the Karachi Stock Exchange (now known as the Pakistan Stock Exchange, or PSX); though there are also four other indices crafted to provide information for different stakeholders.KSE-100 index had been introduced on November 2, 1991, with a base of 1,000 points. On June 30, 2017, the index stood at 46,565 points. Thus, the index witnessed a 4,656 percent increase over the 26-year period. Though the index routinely moves between bullish (increase) and bearish (decrease) trends, the major portion of the bullish trend has been witnessed in the years after the 9/11 terrorist attacks at the World Trade Centre in New York.Despite substantial measures taken towards market liberalization, favouring foreign investors, and with a significant increase in number of firms listed on the KSE -the KSE-100 index witnessed a very normal growth rate of 127 percent in the 10-year period since its inception till 2001.However, in the years following the 9/11 incident, we can see some unexpected increase (3,658 percent) despite the fact that the fundamentals of Pakistani economy did not change abnormally in this period.For readers’ convenience, I divide the post-9/11 years into four periods – from 9/11 incident to March 2005; April 2005-August 2008; September 2008- January 2016, and January 2016-June 2017.After 9/11, the KSE-100 showed a bullish trend where the index rose by 388 percent from 1,273 to 6,218 points by the end of 2004. The fact remains that the number of listed firms on KSE decreased in this period due to difficult compliance procedures laid out in the Code of Corporate Governance of 2002. The main reasons behind the increase were US aid and ease of economic sanctions (that had been imposed as a result of the Pressler Amendment of 1990 and following nuclear tests of 1998). The bullish trend continued till March 15, 2005, with an increase in index of 65 percent reaching the peak of 10,303 points. And then, the index witnessed the 2005-crash whereby it dropped by about 25 percent in eight trading days. The crash – widely believed to be orchestrated – led to a loss of about Rs750 billion to medium and small investors. The effect of the 2005 crash persisted for a few weeks and the index reached 9,556 points at the end of 2005, regaining somewhat and reaching 14,077 points at the end of 2007. The reasons for this resurgence were improvement in overall economic indicators such as GDP growth that remained above 7 percent during this period.The start of the year 2008 proved to be a good omen and the index witnessed the than highest-ever level of 15,676 points on April 18, 2008. Afterwards, the index witnessed a sharp bearish trend as it lost about Rs36.9 billion till August 28, 2008, when the KSE implemented the floor to stop further decline. On December 15, 2008, the KSE removed the floor and trading resumed. Nonetheless, the KSE-100 index lost about 58 percent of its value reaching 5,865 points by the end of 2008. Together, the global financial crises and the new government in office in 2008 contributed to this downfall. In order to control volatility, among other measures a cap of 5 percent was introduced on opening prices of securities. The cap significantly controlled the overall volatility of the KSE.After the declining trend in the last quarter of 2008 and in early 2009, the KSE-100 index experienced a recovery and reached 16,905 points by the end of December 2012. Continuing with this rising trend, it reached the highest index level of 32,812 points at the end of 2015.It is important to mention here that transactions on stock have become expensive following the imposition of capital gains taxation since July 2010; however, this did not affect the bullish trend.The reasons behind this increase were: a policy of allowing investments without scrutinising source of income from April 2012 (this amnesty ended in June 2014); low valuation of Pakistani equity in South Asia; political stability accompanying a peaceful transition of power through a democratic pathway; the business-friendly ‘perception’ of the PML(N) government; Chinese support and investments in major sectors especially power generations; US growth optimism and recovery; payment of circular debts; and increase in foreign remittances, etc.In January 2016, the three stock exchanges in Pakistan were demutualised to make a single stock exchange named the Pakistan Stock Exchange (PSX). The formation of PSX has had a positive effect as the index reached 47,807 points by the end of 2016 and 46,565 points by the end of June 2017.More recently, there has been a drop of 8,402 points in less than a month as the index fell from the highest ever level of 52,877 points on May 24 to 44,475 points on June 20.What lesson can we draw from these trends? Since 9/11, there has been an abnormal increase in the index level without similar improvement in economic indicators and political and law and order situations. For example, from 2001-2016, the average GDP growth was 4.25 percent, average FDI-to-GDP ratio was 1.37, and average inflation rate was 8.24 percent. Since Pakistan is an emerging market, one can expect volatility on the stock exchange, but the abnormal growth witnessed in the post- 9/11 years should be considered in the context of risk-adjusted returns. Investors at the KSE must be cautious about this abnormal growth and they would be better served by diversifying their investments in different sectors, rather than putting all their eggs in one basket. The writer is PhD and assistant professor at the University of Peshawar. Currently, he is based in the US for Fulbright Post-Doctoral fellowship. Contact via: email@example.com Published in Daily Times, July 6th , 2017.