This post lets check why the markets are falling all over the world, as these steep declines are becoming a daily routine for the markets.
Nowadays traders and investors are not surprised even if the markets fell by 2-3% everyday as they have got habituated.
The correct term to describe the current situation would be “Volatile“.
The same time last year on October 2021 the NIFTY was around ~18500 level. Now its in complete contrast to that and haven’t crossed that mark ever since.
Whenever the BULLS take the market up the BEARS bring it down and this is how its been going since more than half a year now. Some are even saying that we might be moving towards full-
fledged bear market.
Now lets see why is this happening
Lets look at some of the feasible reasons for the fall:
There ain’t no easy money anymore
When the COVID pandemic hit governments had no money to cover up for the losses. They had to introduce several pandemic relief schemes.
And several of them coast a fortune to them, So the central bank had to print money like anything in EXECESS. And it was inevitable that this would go to the stock market somehow, as there was so much money sloshing around.
So, it did and the impact, Stock market soared to new highs. NIFTY was ~7800 level at the time of pandemic reached a whopping ~18500 in just a matter of months.
Now it is not happening any more as the tides turn.
Governments are ending/winding up their COVID relief programs. Central banks have stopped printing money. And in US the Feds will soon reverse the process by taking back the money which it already pumped into the markets.
More money pumped into Stock market = Stock Market soars to new heights.
And Remove the same money = Stock Market plummets
Rising interest rates all over the world
Interest rates have been constantly raising by the Central banks all over the world. Recently RBI (Reserve Bank Of India) raised its repo rate by 0.4% and CRR(Cash Reserve Ratio) by 0.5%
repo rate: The repo rate is the interest paid by the Central Bank to Commercial Banks for lending money in the repo market.
CRR(Cash Reserve Ratio): Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.
The markets were already down before the announcement was made by RBI, and literally crashed after the announcement. But the reason for crash is much deeper than the price hike by RBI.
In India, the 10-year government bond yield has increased from 6.8% in July 2020 to 7.4% now. Recently, it jumped up from 7.1% to 7.4% intraday.
This is important because it’s a risk free, long-term investment. If investors are getting a good yield with safer assets they tend to avoid the much riskier ones like stocks.
As this rate goes up for yield, the stock prices go down and this leads to more selling in the market.
Selling by FIIs (Foreign Institutional Investors)
In the Indian stock market FIIs are the biggest players, they decide the market index most of the times.
Before the rise of retail investors and Mutual fund houses after the pandemic only FIIs were the market leaders in the Indian stock market. Even today they play a big role and make an impact on the market.
As a matter of fact FIIs have sold over 20 Billion $ of worth Indian Shares.
They still held close to 620 Billion US $ as on 31 March 2022. But the selling has been relentless. In January they sold 4.46 Billion US $, February, they sold 4.71 Billion US $. In March they sold 5.38 Billion US $.
They have been selling Indian shares for many months now like anything. So much so that their holding in NSE 500 companies dropped to a 3-year low in March 2022.
Since April 2021, FIIs have been sellers in every month except three and they have sold Indian shares worth over US$ 20 bn.
Retails investors tried to buy as much as they can from the falling market, but the Selling by FII meant that only retail investors were the biggest buyers in the market which is nowhere close.
Geopolitical Risks
This war has caused disruption in commodity markets, especially crude oils and certain essential metals. The Sanctions imposed over Russia will also have advert effects globally.
No one knows how the situation will play out. There has been no resolution as of now with the peace talks between the Russia and west.
If the war escalates further then it will cause more harm to the market. As both Russia and west have made nuclear threats to each other and no one wants to see that happen.
Inflation
Prices are reaching sky high for the daily essentials like food and oil, which has caused a panic situation all over the world.
Though the worrying part is retail investors might restrict their spending to save money. Which might include spending on “Stock Market”.
Which may cause more selling in the market as no one wants to hold stocks which are not growing even worse falling.
Unrealistic profit Expectations
During the pandemic many companies started Work From Home trend which allowed them to significantly reduce the cost and go digital and reduce their debts.
This made several companies profitable, after the lockdown was lifted.
Some analysts extrapolated the profits and spreader new that good times were coming and completely ignored the other costs and inflation.
The result as we have seen the markets were touching new heights every day after the pandemic.
Seeing these over-the-top profits many people who had herd mentality jumped into it without any clue and got stuck now as all the markets across the globe are down.
Well to conclude,
These were some of the reasons for failing markets.
For those who are still holding on to the Stocks, check your portfolio for stocks with poor fundamentals and performance. It makes sense to exit them, even at a loss, and put those funds to work in high quality stocks or even debt funds in this volatile situation.
Finally, this is not the right time to exuberance and go all out in the stock market, do your own due diligence and invest wisely.
This was it for today’s post. Feel free to reach out in case of any concerns or feedback.
By,
