Stock Market Reactions and facts

Indian stock markets were lower by around 29 % in the current year, and have since recovered around 14% from the low. Market participants cite various reasons for this performance: inflation deteriorating macro numbers, selling by foreign institutional investors declining global risk appetite and so on.

Here are a few samples of varying perspectives on the stock market. First, a young graduate who has got his degree and has been working since 2003: Stock markets? “A place to make quick money”. Hardly any downside, invest at every correction. Markets always go up.

Next an individual in his late 30s who has been working for 10 years, says: ‘You can make money, but watch for sharp corrections, and a scam every five years’. Third, a home maker who started investing in 2008 says, Stock markets? “Stay away. The kitchen is safer! I lost money in intraday trading”. Experts on the business TV channels say the markets will not rise.

Fourth is a retired bank manager. He says, ‘Stock markets are highly risky, I lost money in the past, when IT stocks crashed. There’s no guaranteed income. Bank deposits are safer’. Fifth, a gentleman in his late 40s with a career of 20 years says, ‘Stock markets are all about timing. If you time it right you make money. If not the volatility will kill you’.

Next, a day trader in stocks says, ‘I’m a daily wage earner. I leverage in future markets. I make or break Rs 10,000 to Rs 20,000 a day’. And lastly we have a stock market investor who says, ‘Buy stocks when crude oil falls, and vice versa’.

These views seem diverse, but there is a common underlying thread: they all take an unfortunately short term view. No one refers to stocks as long term wealth creation tool. The Sensex hit its 2008 intraday low of 12,595 on July 15, 2008 – four days after crude oil touched its all time high of $147/barrel. On the same day, the yield on 10-year government bonds touched a recent high of 9.55%.

Once crude oil prices started falling due to worries about global demand and the unwinding of speculative positions, Indian markets recovered sharply. The trend to sell stocks and buy oil seems to have reversed. Oil is now 20% below its peak.

Nothing has changed significantly in the fundamentals other than sentiments and the drop process. But the stock market rallied 14% from the bottom. There could be other reasons besides oil, but crude certainly facilitated the rally. What is the trend to reverse so that oil prices started climbing again towards $150/barrel? Would the market fail again? If it were that easy, everyone would make money in the stock markets.

Only if the price of oil falls substantially and remains low for a long time will it translate into benefits for the economy, earnings and markets. Although crude prices are crucial to the Indian economy, it’s surprising that at every dollar drop or rise in oil, speculators take the markets up or down.

Retail investors often get carried away by short term movements. Sometimes newer correlations between different factors merge in stock markets such as now, buy equity and sell oil. Such correlation trades often influence market movements in the short run, which then deviate from fundamentals. The long term winners are the fundamentals. Often, stock markets are regarded as an arena for short term speculation especially in a rising market. Stock markets and equity mutual funds are vehicles for long term wealth creation. Investments in these should be made in a disciplined way, irrespective of markets levels. A retail investors should remain invested in stock markets over a few market cycles – at least five years to create wealth. As short term market timer is likely to lose money in the long run, unless he has the gift of predicting the future.