This post was most recently updated on August 14th, 2023
After the recent market crash in March 2020; From the low of 7610 on the 23rd of March 2020, Nifty has bounced back sharply to 10000+ levels on the 3rd of June 2020. That’s a 30% return in just 2 months!
While many people are getting into fear of missing out (FOMO) mode, many experts are questioning if this stock market rally is for real.
Let’s look at recent events:-
Just as of 1st June, Moody’s downgraded India from Baa2 to Baa3 negative! The Indian govt is getting heavily criticized for not giving significant support to the industry.
There is a big fear of mounting NPAs from banks and NBFCs, Factories remained shut for over a month in Q1, and auto sales were 0 for the first time in history and remain subdued in May 2020.
In the West, Federal reserves are leaving no stone unturned and printing money aggressively. The US national debt has reached approx $25 trillion.
As the quotes of famous investor Rakesh Jhunjhunwala start appearing(coincidently they appear the most when the market rises!) saying – ‘I will have never invested in the market if I listened to economist’, The retail investors are thinking have they missed the biggest opportunity?
While people may have forgotten about 2008 market crash after the 30% bounce back. Let’s do a comparison between 2008 and 2020 and check will the stock market rally continue in 2020.
First 4 months of 2008 stock market crash -Jan to April 2008
When we looked at the data for the first 4 months of the 2008 market crash, we found some similarities between the current bounce back in 2008 as well!
From the start of fall on 15th Jan 2008, Nifty made a low of 4500(almost 30% fall) on 17th March 2008 and bounced back to 5200(15% bounce back) and only 20% away from the highs by the end of April 2008! before it started going down again.
What happened after April 2008?
At the end of April 2008, FOMO started kicking in people who thought they are missing the chance to invest at low levels. But the market went down sharply from May 2008.
People realized that the bounce in April 2008 was nothing but a dead cat bounce!
First 4 months of the 2020 stock market crash
2020 stock market crash although not exactly similar to the 2008 market crash there are some similarities.
The market crashed rapidly in 2020 compared to 2008 but it has bounced back sharply as well.
From 15th Feb till 23rd March 2020, Nifty has fallen from 12000+ odd levels to 7500+ level. That’s around 35% fall.
From 23rd March lows to 3rd June Nifty has bounced from 7500+ levels to 10000+ levels that’s a 30% gain!
We are just 20% away from all-time highs! Does it sound similar to the 2008 market crash?
Will the stock market rally continue in 2020?
Well everyone wishes that they have a crystal ball to predict the future but until we find that let’s have a look at what we are dealing with and see if the stock market rally continues in 2020.
The market will most likely sell off once again because of below reasons-
- we are not out of the woods yet from COVID-19 issues. There is a strong chance that there will be a bigger 2nd wave of the virus which will be the actual test for the govt as they will deal with it.
- The 2 months of lockdown will show its impact on the Q1 results of the companies; So when the earning season starts in July market may sell off looking at the numbers.
- The current market rally is mirroring the rally in the west which is fuelled by liquidity. once the liquidity starts to dry up markets all around the world will show their true character.
- Reports suggest that the US has already seen companies filing for bankruptcy, the numbers are already half the levels of 2008 with 7 months remaining for the year!
- People are expecting a V-shaped recovery hoping that demand will bounce back stronger when the lockdown starts to ease but what they are discounting is, with the large-scale layoffs happening. People may not spend as much as they used to do before.
- Indian govt fiscal space is limited as compared to the West. The 20 lakh crore announcement by the govt may not have a material impact on demand growth in India.
- It will be interesting to see what impact loan moratorium has on NPAs. We believe people are underestimating the impact of the moratorium in the banking and NBFC sector.
Is this a bear market rally or are we back to the bull market?
Only time will tell what happened next in the stock market. But we need to be increasingly conscious of the stock market rallies and do not get into FOMO mode while buying stocks.
History suggests that no market crash ends in just a couple of months. Most of the time a slow and painful process. History says every market crash has a dead cat bounce, Question is – are we in the dead cat bounce?
Disclaimer – Do not make your investment decision based on this article. Always consult a financial advisor before making any investment decision.