Moneycontrol Pro Panorama | Bear Bottom

India has had four bear markets in the past 25 years that have fallen more than 20 percent from their peaks. The last bear market was in 2020 when the pandemic caused the indices to fall by 39 percent and it lasted for less than three months. The pace of the fall during the pandemic was three times that of the 2008-09 global financial meltdown.

The sharp pandemic-led bear market had no precedent, which explains the panic in the market. Thankfully, a coordinated effort by central banks to pump in liquidity helped the speedy revival.

Bear markets tend to last longer than corrections, with the longest bear market for the S&P 500 during the Great Depression lasting for 2.8 years. Since the 1950s, the longest bear market was the dot-com bubble in the early 2000s lasting for 2.1 years.

Only time will tell how the present correction will end. Markets can hover around the current levels for a few more months before moving higher, or they can enter bear market territory by falling more than 20 percent from their mid-October 2021 highs.

In case the market falls, the report mentions the Nifty going down to 14,500 levels. This has been arrived at by extrapolating previous falls. In the six previous long declines, the lows in the first seven months equated to a median of two-thirds of the eventual price damage. Overlaying this would give a target of 14,500 for the Nifty, of a 21 percent fall from the top.

A lot would depend on how inflation behaves, especially in the US market. Though the Indian government has taken steps to bring down inflation by reducing taxes on fuel and fiddling with import and export taxes, the previous four bear markets show that the Indian market’s recovery from a bear market is dependent on what happens in the international market.

Unless inflation is controlled at the global level and interest rates start declining, markets are likely to be under pressure. Markets may de-couple intermittently, but when it comes to bear and bull market extremes, they are normally in sync with each other.

Hedge Fund manager Bill Ackman recently said the raging inflation will only dissipate if the Federal Reserve acts more aggressively or the market sell-off turns into a full-on collapse. Given the Fed’s history of the speed of response, the latter is a more likely scenario. The advance PMI data for the advanced economies show that the easing of COVID restrictions and pent-up demand are holding up growth, but high inflation is affecting demand. But more action by central banks is needed to get inflation down to manageable levels.

In the Indian markets, the steps taken by the Indian government may nudge domestic investors to pump more money into the markets, but unless the global markets revive, Indian markets may linger between a correction and a bear market.

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Shishir Asthana Moneycontrol Pro