Another day, another fall in the stock market.
This sharp decline is becoming regular. It is not surprising to traders and investors when Nifty intraday is down 200 points.
This is in stark contrast to the market situation last year. Nifty had reached around 18,500 in October 2021.
It hasn’t crossed that mark since then. Instead, the best word to describe the market would be ‘volatile’.
Whenever the bulls take the market up, the bears bring it down again. This is how the market has been operating in the last seven months.
But ever since it came down in March 2020, the bulls got used to the market.
Now the bears are under control. Coming to the market, we say that there has been a change in sentiment. Some are even talking about an outright bear market.
Why has this happened?
Let’s look at the reasons one at a time.
no more easy money
To understand why the tide is turning against the bulls, we have to understand why it went in their favor in the first place.
When Kovid came in the grip, every government in the world turned on the money tap. They spent heavily to stimulate their economies during the lockdown.
Central banks flood the world with newly printed money. With so much money slipping around, it was inevitable that a lot of it would go into the stock market.
And it did.
Nifty rose from 7,800 in March 2020 to 18,500 in October 2021.
But now things are different.
Governments are closing their COVID funding programs. Central banks have stopped printing money. In fact, the US Fed will soon reverse the process of withdrawing the money it has put in.
More money = higher stock price
less money = lower stock prices
rising interest rates
Interest rates are starting to rise around the world. Today Reserve Bank of India increased its repo rate by 0.4% and CRR by 0.5%.
The market was already down in anticipation before the announcement and crashed after that. But the cause of the accident goes much deeper than the rate hike.
The most important interest rate in the world is that of 10-year US government bonds. The yield on this bond is the global benchmark for long-term interest rates.
This is important because it is a risk-free, long-term investment. If investors can get a good yield, they will have less incentive to invest in riskier assets like stocks.
Also, analysts use this interest rate as the ‘discount rate’ to price shares when they make buy/sell recommendations.
As this rate rises, the value of the shares goes down. This leads to more sales in the market. The 10-year US bond yield has risen from 0.5% in August 2020 to around 3% now. It was only a matter of time before it hit the stock market.
In India, the 10-year government bond yield has increased from 6.8% in July 2020 to 7.4% now. Today, it rose from 7.1% intraday to 7.4%.
sell by foreign investors
Foreign Institutional Investors (FIIs) are among the big movers and shakers in the market.
Before the rise of Indian retail investors and Indian mutual funds, only FIIs were the big boys in the Indian stock market.
Even today, they are a mighty force. But the important point here is the declining trend of Indian stocks in their holdings.
Do you know that FIIs have sold shares worth over $20 billion since April 2021?
He still had close to $620 billion as of March 31, 2022. But sales have been relentless. In January they sold $4.46 billion. In February, he sold $4.71 billion. In March they generated sales of $5.38 billion.
They have been selling Indian shares for several months now. His stake in NSE 500 companies fell to a 3-year low in March 2022.
Since April 2021, FIIs have been sellers every month except three and have sold Indian shares worth over $20 billion.
Retail investors offset the sell-off with their enthusiastic buying. But the selling of FIIs meant that retail investors were the biggest buyers in the market.
In other words, if retail investors stop/decrease their buying activity, the market will be in for a very tough time.
This risk is routinely overlooked by investors, especially in bull markets. But it is one of the most significant risks to global finance.
Markets do not like uncertainty and changes in geopolitics always lead to uncertainty.
The Russo-Ukraine War is the latest example of this.
This has caused disruption in commodity markets, especially crude oil and some metals. The sanctions imposed on Russia will also have an effect around the world.
No one knows how the situation will be. As far as resolution is concerned, there is no light at the end of the tunnel.
If anything, the war is on the rise. Both the West and Russia have made dangerous threats against each other, including the use of nuclear weapons.
This has stirred the global markets.
Rising prices of essential commodities, especially food and oil, have created a lot of trouble.
The concern in the market is that retail investors, who are driving the market, may choose to cut spending. It can ‘spend’ on the stock market.
They can also withdraw their money in case of loss.
When inflation is high, no one wants to hold onto a stock that is neither rising nor deteriorating, falling.
This leads to more sales.
unrealistic profit expectations
Many companies have geared up during Kovid. They lowered their costs and went digital. The work from home culture fueled that trend.
It actually made many companies more profitable, especially when the lockdown was lifted.
Analysts then projected these gains and assumed the good times would continue. All kinds of ‘stories’ were floated to keep the momentum going.
But inflation has put an end to those hopes. Raw material costs, employee costs, transportation costs, everything is going up. This has put a stop to rising profits.
Analysts are no longer able to justify the higher stock prices. Thus, they have started lowering their earning expectations.
Lower future expectations = lower stock prices
Then the simple reason to sell is because everyone else is doing it.
It takes a lot of emotional strength to keep your faith when the market is against you.
Most people succumb to fear and plan to sell their stocks even though they have planned to hold them.
Think of it as reverse FOMO. Fear of Missing Out (FOMO) brought many new investors into the market during the lockdown.
As long as the market was going up, they were happy. But now fear is working in the opposite direction.
If the market continues to fall, many investors will throw in the towel. They will sell just because everyone else is selling.
These are the main reasons behind the fall in the stock market.
Individuals will also have their own personal reasons. All these factors combined have put a lot of pressure on the bulls.
Those having cash on hand will get lucrative buying opportunities in select stocks.
For those still on hold, check your portfolio for stocks with poor fundamentals. Even if losses occur, it makes sense to exit them and work those funds into higher quality stocks.
Finally, this is not a time for exaggeration. Do not invest aggressively in this market. Take the time to do your due diligence on the stocks you want to buy before investing.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)