Why did the stock market crash? A 150-year-old investment bank goes bankrupt in the most financially developed country in the world. Or someone somewhere decides to eat a bat. Most market crashes can be attributed to some or the other catalyst. But let us not fall victim to the ‘single cause fallacy. Most phenomena have multiple reasons behind them.
In this article, we will try to understand why did the stock market crash this year? We shall see where we were and also where we are today. After that, we will also go through the possible explanations available for the market crash.
NIFTY50 Hits All-time High
The benchmark 50-stock index NIFTY50 topped 18,600 points in October last year. That was a 125% gain in a matter of 19 months following the Covid-led pandemic crash of 2020. But what followed took Indian investors and foreign investors investing in India by surprise.
The Rally Comes to a Halt in October
From October 2021 the market declined 18% to hit its low of 15,183 points in June last month. Though the market has undone some of the damage, at 16,340 points, it is still 12% down from its all-time high of 18,600 points.
Reasons for the Stock Market Crash
The markets have bled red across the globe this year. This has resulted in losses of billions of dollars for investors. Market pundits are fearing macroeconomic disasters with fears of the US economy going into recession. As markets fall in countries around the world, India has been no exception either.
So without further ado, let us rush to understand why did the stock market crash this year?
The Omicron variant of the novel Coronavirus was discovered in November last year. In the initial days, its quick spread concerned the health authorities. Likewise, investors got scared too. Later, its mild symptoms make it border more on the endemic line.
As a consequence, the market suffered a minor blow with some states announcing lockdowns to prevent spread. This posed a challenge to companies. Their earnings suffered with the hospitality, tourism, and entertainment industries getting damaged the most.
Though the market rebounded quickly, it became clear that Covid will stay.
Covid’s two waves unearthed the fault lines in the global logistics and supply chains. Though the markets shed their worries and bounced back, the supply-chain issues stayed.
China being the world’s largest producer and supplier is also the most populated country in the world. To prevent the spread, the Chinese government announced intermittent lockdowns across the nation. This worsened the seamless operation of supply chains leading to higher prices and lower capacity utilization. This translated into weaker earnings for corporations.
And it was not just China. Various other countries around the world took preventive steps to curb another wave of Covid. All of it created ripple effects with a multitude of commodity supplies getting affected.
As an economist, if you would want anything undone, it would be the Russia-Ukraine war. Russia invaded Ukraine in February throwing the global economy into commodity and energy crises.
The crude oil sky-rocketed from almost $90 per barrel to its all-time high of $139. Even before the invasion, the prices were treading upward as the tension was building up.
The higher energy and commodity prices led to higher inflation. Consequently, higher prices ate away the profit margins of the companies. Expensive products decreased purchasing power of the customers.
Lockdowns imposed to limit virus spread led to a sudden fall in demand across the globe. To prevent a recession, central banks of various countries slashed interest rates to an all-time low. This helped to steer clear of recession but lead to surplus money supply and excessive borrowing.
What followed was increased demand for the goods and inflation consequently. Globally, economies witnessed decadal high inflation figures. Furthermore, supply chain issues coupled with soaring energy prices made the inflation rates reach decadal highs.
Central banks of various developed and developing countries increased interest rates to taper inflation. When interest rates rise, the money supply in the market decreases. This happens because debt instruments become more attractive to investors.
Thus, investors take out money from markets to put into debt instruments. As a consequence, share prices decline.
Many reasons have spooked foreign portfolio investors (FPIs) in India. FPIs are investors from other countries who invest in India.
Since the start of the year, FPIs have sold shares worth ₹2.56-lakh crore in the Indian stock market. Some experts have said the FPIs are booking profits across all emerging markets as valuations touched all-time highs.
Others say that foreign investors are growing cautious as fears of the US going into recession are getting stronger.
Last but not least, high valuations are one other reason that is being attributed to the market crash. As the market after the Covid-19-led crash rebounded, the valuations touched all-time highs.
The rise in the stock prices was significant. However, the earnings of many companies didn’t improve in tandem with the prices. Some say this disconnect in price and value eventually led to the crash as the market moves in cycles.
Even as the markets remain in turmoil, some green shoots are visible. Prices are inching higher from their new 52-week lows they hit recently. But the concerns are still there.
Nevertheless, it might be a good time to accumulate stable companies with strong fundamentals. The prices of most companies are trading at or near their all-time low price-to-earnings and price-to-book value ratios.
Furthermore, rupee-cost averaging is also another way to tide over any bear market. Rupee-cost averaging is the process wherein an investor invests a set amount every month. So when the price rises, the investor gets lesser stocks. However, if the price declines, the investor is able to buy more stocks. One key benefit of this method is it helps to control the sentiments of the investor.
Different investors follow different strategies during the market. How about you tell us in the comments below which ones you use? Or are you saving cash or buying more?
It will be interesting to know when the NIFTY50 clocks the 18,000 mark again. Till then, keep saving and keep investing.
Vikalp Mishra is a commerce graduate from the University of Delhi. He likes to write on finance, money and business. He is a voracious reader with a genuine interest in investing. Drop him a mail at email@example.com.
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