Stock market crash! Why should retail investors keep some ‘dry powder’ ready?

Nobody can ever predict a bottom and in fact, nobody will even come to know when the markets hit the bottom, it will only get known much later.

Stock market, equity, all-time high, bull market, investors, risk
Let us first see why did the markets correct after one of the biggest bull markets of all times?

By Col Sanjeev Govila (Retd)

Nifty 50 is down nearly 18% from its all-time highs of 18,600 seen last year in October. And most of this downturn has happened within this year. Technically, the markets have been down for more than 8 months now. So, we’re just 2% away from officially being declared to be in bear markets.

The celebrated US investor, Jim Rogers, complicated the matters recently by declaring that this market will be the worst bear market of his entire life-time. A well-known Indian economist went a step further saying that the US is not moving towards recession – it is already in recession!

On the other hand, Indian markets haven’t fallen as badly as the global markets – US Nasdaq 100, the bellwether of tech stocks worldwide, is down 34% from its highs of Nov 2021 and the broad-based S&P500 is down by 22%. Indian markets are withstanding the shocks of inflation, commodities, oil and everything else much better.

What do you, as a retail investor who has been listening to all these voices, do now? Is the market about to get worse or is the market about to go up and you are likely to miss the bus once again if you wait and the markets gallop ahead?

Let us first see why did the markets correct after one of the biggest bull markets of all times?

Receding Covid opened up the world but the supply-side dynamics are taking their own time to catch up. Economies are awash with cash pumped in by the central banks and Oil politics is in full bloom with the Russia-Ukraine war not making the things any easier.

The scenario is ideally poised for an inflation bloom, which is now everywhere that you can see. The US just saw its highest inflation rate in the past 40 years and no economy is untouched by the Growth Vs QT (Quantitative Tightening) dilemma. As the central banks around the world struggle to rope in inflation and save their economies and population from its effects, companies will face difficulties in growing and reporting decent numbers. This is what is roiling the stock markets.

Is there an easy solution to this? There is none, unfortunately. Liquidity and supply side issues, and hence controlling the inflation, will take their own time to be sorted out. The markets will only stabilize when they see some light at the end of this tunnel. Hence the pain that has to occur will occur.

This is not the time to sell since the Indian markets have come down quite a bit and the Price-to-Earnings ratio is once again coming to rational levels, standing at around 19% now. But this is not the time to go ahead and empty your purse too since nobody knows how much more the markets are planning to go down.

Indian economy has definitely been much more resilient in this complete cycle than the US, European and other economies of the world, as the numbers clearly depict so far.

With the bottom not known but the ratios becoming interesting once again, most analysts believe that we’re not far away from the bottom in Indian markets at least. That is why it is now turning into a slugfest – and the winner will be the one who can cut out the noise, wait patiently with dry gunpowder ready, control own mind and emotions, and move in when the markets start giving a signal that enough is enough.

Nobody can ever predict a bottom and in fact, nobody will even come to know when the markets hit the bottom – it will only get known much later.

So, you have two strategies to go by. Either start buying in small lots around 14,500 Nifty which had formed a good technical support in April 2021, Or, wait for a decisive bottom to be formed and then start your buying with a clear knowledge that such a strategy could also mean that your buying could start at higher levels much after the decline in the markets has reversed.

Do not give in to any panic in buying the upturn. The reasons which caused the market downturn will take their own sweet time to be sorted out – as they say, markets took an elevator to come down but will take the stairs to climb up.

How well you play the game is entirely dependent on how well you score in the patience test, cutting out all noises and rein in your emotions.

(Author is Certified Financial Planner, CEO, Hum Fauji Initiatives)

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