Over the past couple of years, the market has been in a mood to take all news as good news. Today, it may well be the reverse
After the sharp correction—a decline of over 10%—in the Dow Jones earlier in February, the US equity markets have smartly recovered about half of the decline in a matter of a week. Of course, the factors that triggered the decline—very high equity valuations and a fear that the strengthening economy would trigger relatively serious bout of inflation, which would force the Fed to raise interest rates even more than they had planned—remain in place, so it’s hard to see how there could be any significant gains in the near term. The chart below shows that the index has bounced up to a resistance point, which will require some very strong force to break. If this is not forthcoming, it could fall back sharply to the 23,500-24,000 range. What is worse is that if there is any “negative” news, it may pierce that support and lose another 1,000 points before steadying. The word negative is in quotes because in certain environments, like this one, news that should be seen as positive—for example, continued strong employment figures, good growth numbers—would be taken as negative for the market since it would reinforce the fear of much higher interest rates. Again, news that, in itself, is negative—such as worsening trade figures—would also point to stronger growth and a fear of continued higher rates and push the market down.
It would seem that there has been a shift in sentiment. Over the past couple of years—since the taper tantrum in December 2015—the market has been in a mood to take all news as good news. Today, it may well be the reverse. Thus, while Trump’s arrogance, petulance and the worsening partisanship in the US Congress were all taken as part of the upbeat environment, those same factors, which will likely intensify as the US Congressional elections approach, would be seen as negative. Again, it would take hugely negative numbers on growth to turn market back from its fear of higher interest rates. Net-net, I’d say US stocks will slip further.
The Indian markets have also suffered, both by reflection and, of course, our own foibles. The Sensex only lost about 5% when the Dow Jones corrected, but, as it was getting ready to bounce back, got hit by the Nirav Modi scam, which could keep markets off balance for quite some time, given that the entire public sector bank complex will slip deeper into a funk.
What is worse is that technically there is very little support for the Sensex. So, if there are more skeletons that tumble out of the closet, or the government or the Reserve Bank of India make some foolish moves, or Mr Modi (the other one) suffers some fresh electoral reverses, the market could really lose its precarious balance.
This is all the more a shame, since business finally seems to be getting strongly on track.
Every single company I have spoken with in the past few weeks is extremely bullish on how things are going. The sentiment is really strong so it is unlikely that the market reversal would upend things—but hey, this is India and we have long had governments that shoot themselves (and us) in the foot. Plus, there is the global market which is still in a (somewhat less but) precarious state. Don’t put any fresh money into equities right now. The rupee, too, has broken through the bottom of a channel it had been dancing in for well over a year, and appears to have some more downside momentum. It looks like sub-64 levels are gone (for some time, at least) and we may even move to a 65+ range in the near future.