5 Reasons Why Share Markets Crashed Today, December 20, 2023

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The Indian stock market suffered a massive blow on December 20, 2023, as the BSE Sensex and the NSE Nifty tumbled by over 900 points and 300 points, respectively, in just three hours of trading. This was the worst single-day fall in eight months. What triggered this market meltdown?

5 Reasons Why Share Markets Crashed Today, December 20, 2023
5 Reasons Why Share Markets Crashed Today, December 20, 2023

Let us look at the key factors that led to this carnage.

Negative Global cues

The recent downturn in financial markets can be largely attributed to a complex interplay of global factors, prominently shaped by the US Federal Reserve’s policy shifts and the emergence of the Omicron Covid-19 variant. A critical pivot was the US Fed’s announcement to curtail its bond-buying program by $15 billion monthly starting in January 2024, coupled with indications of three interest rate hikes within the same year.

This shift reflects a strategic response to escalating inflation concerns and signs of an overheating US economy. The Fed’s increasingly hawkish tone has sparked apprehension among global investors, fueling fears that tighter monetary policies might hinder ongoing economic recovery and corporate profitability.

Concurrently, the global market landscape has been reacting sensitively to the advent of the Omicron COVID-19 variant, now present in multiple nations. The World Health Organization‘s classification of Omicron as a ‘variant of concern’, citing the potential for heightened transmissibility and immune evasion, has escalated global uncertainty. This development raises the specter of renewed lockdowns and travel curbs, posing significant risks to worldwide economic growth and consumer demand.

Rise in Covid-19 cases in India

India is witnessing a concerning uptick in COVID-19 cases, including an increase in reported deaths and the detection of the new sub-variant JN.1 across three states. This development has prompted a detailed review of the nation’s health facilities by the Union Health Minister, affirming that states are on high alert with intensified surveillance measures.

The sub-variant JN.1, currently classified as a ‘variant under investigation’ by the Indian SARS-CoV-2 Genomics Consortium (INSACOG), is undergoing rigorous analysis to ascertain its implications for virus transmissibility, disease severity, and vaccine effectiveness.

This surge in Covid-19 cases has heightened investor anxiety, fueling fears of potential economic implications. There is a growing concern about the reintroduction of restrictive measures, including lockdowns, which could impact various sectors and overall economic stability.

Profit booking

Another reason for the market crash was the profit booking by the domestic investors, who wanted to lock in their gains and avoid further losses. The market had rallied too fast and too high in the previous months, and was trading at a premium valuation compared to the other markets. The market was also due for a correction, as it had reached overbought levels and faced resistance at higher levels. The profit booking triggered a chain reaction, as the selling intensified and the prices fell sharply.

Broader markets decline

The market crash was not limited to the large-cap stocks but also affected the broader markets, such as the mid-cap and the small-cap stocks. The BSE Midcap and BSE Smallcap indices also plunged by over 3% on December 20, 2023. The broader markets had outperformed the large-cap stocks in the past year, as they benefited from the recovery in the economy and earnings. However, the broader markets also faced the brunt of the market crash, as they were more vulnerable to the liquidity crunch, valuation concerns, and risk aversion.

Rise in crude oil prices

The surge in crude oil prices has been identified as a pivotal factor contributing to recent market instabilities, particularly affecting oil-importing countries like India. This rise can be attributed to a combination of supply constraints, burgeoning demand, and escalating geopolitical tensions.

Key factors influencing the supply constraints include OPEC+’s decision to continue production cuts, US sanctions on Iran and Venezuela, and disruptions in Libya and Nigeria. Concurrently, a resurgence in global economic activities, notably in major oil-consuming nations such as China and India, has bolstered demand. Geopolitical tensions, primarily stemming from the Russia-Ukraine conflict, have added uncertainty to the stability of oil supplies from Russia, a significant non-OPEC provider.

This escalation in crude oil prices has had far-reaching consequences on the Indian economy, intensifying the import bill, widening the current account deficit, and exacerbating inflation and fiscal deficits. Additionally, sectors sensitive to oil prices, including aviation, transportation, fertilizers, and plastics, have seen diminished profitability. Furthermore, the increase in oil prices has constrained consumer disposable income, thereby dampening domestic demand.

Closing Thoughts on Share Markets Crashed Today

The market crash on 20th December 2023 was a result of a combination of global and domestic factors, which created a negative sentiment and a panic among the investors. The market crash, however, could also be seen as an opportunity to buy quality stocks at attractive prices, as the long-term fundamentals and the growth prospects of the Indian economy remained intact.

The investors should adopt a cautious and selective approach, and focus on the sectors and the companies that have strong balance sheets, resilient business models, and sustainable earnings growth.

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