Waiting for the Bottom?

April 2, 2020 . Maulik Madhu

Stock markets world over are going through turbulent times. It’s hard to predict where the markets are headed in the coming days let alone in the next few weeks. 

We are surrounded by a spate of negative news – from rising cases of Coronavirus to lock-downs to the risk of job losses, and businesses running out of cash. 

Given the uncertainty around Coronavirus, it’s hard to tell or rather hard to believe when, if at all the situation will turn around. This is despite the unprecedented policy measures announced by governments and central banks globally. 

So, does that mean the markets haven’t bottomed out yet and will fall further? That is impossible to tell. 

Will they start moving up once the news turns positive? It’s likely. Though, there are instances that show that markets don’t always wait for positive news. In the past, markets have started moving up even as the news remained largely dismal. 

Investors who would have waited for the news to turn positive would have been disappointed in hindsight. 

Let’s go back in time and see how it was during crises – when the markets fell and bottomed out (and then started recovering) without us even realizing it. All this happened while the news flow (see the news headlines below the charts) was still negative. 

Demonetization – Nov 2016

What happened?

  • Following PM Modi’s demonetization announcement on 8 Nov-16, the market started to slide, hitting the bottom on 21 Nov 
  • Then the market recovered a bit, only to hit another low on 26 Dec
  • From thereon the market started on an upward trajectory despite the not-so-good news flow 

Eurozone Crisis 2010-12 

What happened?

  • Worsening of the ongoing Eurozone Crisis led Standard and Poor’s to put the credit ratings of 15 Eurozone nations on watch in Dec-11
  • Sensex bottomed out on 20 Dec-11 and then rose until 21 Feb-12
  • Then it hit another low on 23 May-12 
  • Thereafter, shrugging off the negative news, the market started recovering

Subprime Crisis 2008-09

What happened?

  • After a steep decline from Jan-08, the Sensex bottomed-out on 9 Mar-09 
  • The Indian market (and the economy) too bore the brunt of the Subprime crisis which started with the burst of the housing bubble in 2008 engulfing the entire financial system and driving the US economy into a recession
  • From Mar-09 onwards, however the market (Sensex) started recovering

So, what are the key takeaways from these charts?

While we are in the midst of challenging times (such as today), the news around us is likely to be largely negative. So, while you may like to wait for some positive news before investing, the market may turnaround before that happens. 

Past market recoveries show us that the news doesn’t actually have to be good, it just has to be less bad than what has already been discounted in stock prices.

Also, all crises (in the past and today) have been accompanied by stimulus and other supportive measures by governments and central banks. So, even as the news about the prevalent situation remains negative (thereby depressing market sentiment), policy announcements can bring about a possible shift in market perception (and a change in the ground situation over time). In the meanwhile, the market may start moving up even before you know it. 

This is why exiting equities now to enter after the news flow becomes positive can turn out to be a very futile strategy.

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