The Indian Market is now on a all time high. Nifty50 is on 17800 and sensex is on 60000 as on 24th September 2021. But are we heading towards a Bear market in the coming days or months?
One has to make sure that the crash is going to happen 100%. It will happen at some point and we have to be prepared for it and we need to understand how not to lose money during the bear market. Also one has to not be so afraid of the crash of the stock market. Even though many people lost money during the Corona Virus crash as market declined from 12500 to 7500 but even then the market blew up and now people are experiencing all time high gains as Nifty50 has reached 17000+.
FIRST lets see what is a Bear market?
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs. For example during the 2008 Financial crises the market(S&P 500) corrected by 56% and the recovery period was 4 years. Also during Corona pandemic market corrected by 40-45% but started showing an upward trend in nearly 6-7 months. So even though market corrected hugely, it found momentum very fast and started increasing( specially during Corona Period). This is because in early 2000 or in 2008 there were many heavyweight companies like automobile companies whos P/E ratio rises very slowly so they were less volatile.
But nowadays situation has changed and now there are many “Tech Driven Companies” which are more volatile. So even though there can be a Bear Market but their is a possibility that it is not prolonged for maybe more than 1 year. Now since Bear market can come, question is how can we make sure that is has less impact on us. This can be done by stating the indicators of the Stock Market Bubble(ie when prices for a stock or an asset rise exponentially over a period of time, well in excess of its intrinsic value.):
1) STOCK MARKET
We should check the stock market to determine whether the stock is overvalued or not. This can we done by:
A) P/E Ratio: Normally on average p/e ratio is between 18-20(maximum being 25). So P/E Ratio can be looked upon to determine overvaluation. For example: During 2008 January P/E Ratio was 28.25 before the crash and then it went down till 10. If we talk about this year then on January 2021 , P/E Ratio was 42 but currently it is 26.84 in September.
B)Market Cap to GDP Ratio: Normally on average it is 79%. During 2008 financial crises market cap to GDP Ratio was 150% and today it is 122% which is more than the average historical data.
C)Studying Average Return of Stock market: Normally this is around 15%. But before 2008 financial crisis for the period 2004-2007 there were many instances were returns were close to 30%. And then during 2008 financial crisis return averaged out and became negative.
2) BOND YEILD CURVE
Under normal circumstances, Bond yield curve is upward sloping. It means that in short term Risk is less since return in less but in long term Risk is High since Return is High. So on Nov 2006 (before 2008 crisis) Bond Yield Curve became negative(downward sloping) and in 2020 feb curve also was negative. But if we talk about September 2021 Bond Yield curve is normal ie upward sloping.
3) MONEY SUPPLY
During Covid Money supply was high since US government was printing more money and supplying it into US market as well as buying corporate bonds. This has also created impact on Indian market since a lot of FIIs come from US Investors. Also at the same time interest rates in India is also quite low. Therefore money supply can also be looked upon.
So there are lot of indicators to check whether Market is overvalued or not.
In my personal view and after studying about the market behavior i would suggest that one should-
- HOLD GOOD STOCKS like HDFC etc.(dont sell it)
- KEEP A CHECK ON HIGH DEBT COMPANIES
Always keep that in mind market will always go to its new peak since economies will grow and always do long term investing in fundamentally good stocks because bear run can happen at any time. Be a smart investor and keep investing.
