Why you Should be Cautious in the Stock Market Going Forward?

If you would have asked anyone on 23rd March 2020 when Nifty hit 7600 – where they see Nifty in 6 months of time? I bet, 90% would have said levels between 6000-8000.

Here we are on 23rd September, exactly 6 months after the low 23rd of March 2020. Nifty is at 11130, that’s almost 50% returns on the index in 6 months!

It’s not just Nifty a lot of stocks have given returns to the tune of 2x/3x since the low of March 2020. Someone rightly said, “Buy when everyone else is selling and hold until everyone else is buying”.

We have certainly reached a point in August 2020 when everyone was buying whatever stock that didn’t run up since March 2020. There is now a flood of IPOs in the primary market to spice up the investor’s interest.

So what exactly happened in these 6 months?

Well, to start with March 2020 stock market crash was an exaggeration of pessimism in a short span of a month. Markets were falling like there is no tomorrow because of the COVID-19 outbreak. Indices fell almost 40% from the peak in a month all over the world.

When the investors realized that the fall was sudden and was an opportunity to lap up good quality stocks. The first bounce in Nifty was till 8800-9000 where it consolidated for some time.

Coincidently, the stock markets started rising up when the lockdowns were enforced all around the world when there was no economic activity happening. There is an obvious question why did that happen?

The answer lies in the US Fed action – The US Fed had cut the interest rates to historically low levels of 0.25% thus printing unlimited money since March 2020. This has flooded the market with too much liquidity which pushed the stock prices all over the world.

have a look at the below 1-year chart for NASDAQ; NASDAQ not only regained all of the losses that it made in March 2020, it went on to make new highs in August 2020.

Stocks like Amazon, Tesla has given 3x/4x returns since March 2020. There is a FOMO(Fear of missing out) in these stocks.

How does the US Market Influence Indian Stock Markets?

Contrary to many beliefs, markets all over the world are driven by the US markets. When there is a flood of money in US markets then that money makes its way into Indian markets as well.

There is pouring of FII investments into India after March 2020 pushing the stock prices of many stocks. Reliance is a big factor in the market rally since March 2020.

Reliance has made a low of 870 in March 2020 and Reliance is at 2200 in September 2020. That’s almost 3x return and that too for the biggest company of India.

Reliance Industries has managed the JIO stake really well, they brought many stakeholders into Jio which then pushed the prices of Reliance. Reliance itself has a weightage of 13.63% in Nifty! so imagine how much of a contribution has come from Reliance in this market Rally.

Let’s have a look at how the major indices have performed so far:

As you see in the above table all the indices have given a decent return since March 2020. Market was kissing distance away from all time high in August 2020.

Why Markets may face a tough time ahead?

There is one thing in the stock market that is always true is the market doesn’t always go in one direction! Most of the time goes against the consensus; when everyone was selling in March 2020 it went against the consensus and gave stellar returns in 6 months! and now everyone is so bullish in markets It won’t surprise me if the market does the opposite thing.

It’s not just that, There are some big events happening around the world

1. 2nd wave of Coronavirus has started impacting countries all over the world leading to 2nd wave of lockdown!
2. US presidential election in November which will be a big factor in markets after November.
3. An easy money/liquidity-driven market will face the reality of the economy sooner than later. Inflation will kick in soon which may push central banks to think about rate hikes.
4. End of Moratorium – skeletons will be out of the closet very soon in terms of bad loans
5. many businesses are still closed – the economy is in deep stress

Let’s have a look at how the top 100 companies have performed in 2020 so far

If you see above 25 companies gave more than 100% returns since the low of March 2020. One of them is Reliance giving 156% returns!

There are some laggards as well companies like Coal India which is still near the lows for this year. Also, 2 HDFC group companies which are very near to their March 2020 lows- HDFC Ltd and HDFC AMC!

Closing thoughts!

Although no one wants to see the stock market going down at the same time you need to be mindful to assess the market conditions and market outlook going forward. With markets already at an elevated level and too many uncertainties, ‘it’s better to be safe than sorry‘.

Please note – this is in no way any recommendation to sell your stocks, please consult your financial advisor before making any decision on investing in the stock market.