Some say we are in a bear market, others say that it is yet to come. Whatever happens, deciding what to do is overwhelming. We simplified it for you. Read on…
Understanding why
The first step of knowing what to do lies in understanding the situation at hand and being able to look at it from different perspectives. Let's understand what is going on and why we think the stock markets are headed downhill.
Fundamental Analysis
The Russia - Ukraine fight is doing harm to both world peace and world economics. A fight for resources and wealth is a global crisis. After adopting a violent approach, the world has cut ties with Russia. Only a minuscule number of countries are willing to trade with them and Russia has also been stripped of most of the common international payment systems, both online and offline.
Both Russia and Ukraine fulfill 40% of Europe’s energy demands. Shortened supply of oil has created stagflation like situation, sending energy prices into a frenzy. Oil represents a huge chunk of any business cost and thus, inflation is bound to follow. High inflation demands high-interest rates from governments and a thud to the stock markets as a result.
There’s more.
The United States of America, the superpower of the world, is in roughly $3.9 trillion of debt. Repaying fiscal debt means raising taxes and decreasing public spending. As people lose purchasing power and feel the pinch of inflation, investments are the first place to get affected. Declining interest in the NASDAQ and NYSE does not take time to create ripple effects in other stock exchanges across the globe.
Technical Analysis
Have a look at the daily chart of Nifty above. After the markets miraculously recovered from the initial lockdowns in 2020, many seasoned players are calling it a bubble and overbought zone. Guess what? They are right. A classic downtrend appears to be just starting, marked by the white lines connecting lower highs and lower lows.
Take a look at those red and yellow lines as well. When the 50-day moving average (red line) crosses the 200-day moving average (yellow line) from above to below it, it’s called a ‘death cross’, a clear indication of the incoming bearish phase. Looks like it’s just about to happen.
But we cannot say anything for sure, we are not astrologers.
Behavioral Analysis
Just like a situation influences people, people influence situations.
Inflation reduces the purchasing power of customers and that makes them divert money away from stock markets to areas where safety is a priority. Banks are the go-to option since reserve banks would raise interest rates for the very reason of curbing inflation.
A tough market is not good for raising money. This bearish sentiment is gauged well by investment bankers and hence you may see lesser IPOs this time around.
The solution
Stick to the plan
Low prices are like a blessing in disguise. Buffett says:
Be fearful when others are greedy and greedy when others are fearful.
This is a great time to collect those blue chips and other dream stocks you want to have in your portfolio.
We know this is the tricky part for long-term investors. You might probably be thinking it is a good time to sell most of your portfolio and rebuy at lower prices. Well, here’s why that is a bad idea:
You CANNOT time the market. You are not an astrologer.
If the wait is long, you might lose out on dividends.
You will have to pay tax on your gains, instead of avoiding it altogether by holding your investments.
What you can do though, is rupee cost averaging, i.e., buying more of what you own as and when prices slip. This will help you tone down your average buying price and stick to your long-term goals.
It can be tricky to stick to your investment plan, but remember that consistency and discipline pays off like anything. The following might help you get back on track:
Other asset classes
If you are looking for trading opportunities, let me remind of some asset classes that move inversely to capital markets. Some of them are:
Commodities and precious metals like gold and silver.
Items that form the inflation index basket, like energy, wheat, corn, etc.
Government bonds since banks are raising interest rates.
Please remember though, that each asset class has its own trajectory and needs a different strategy. Adopting a holistic approach to creating a diversified portfolio will pay you well in the long run and improve stability.
You can learn more about various alternatives to stock markets here:
A bearish market is a tough time for all - investors, businesses, and governments. But it has been proved that markets only go up in the long run. Stay invested.
Create your profile
Only paid subscribers can comment on this post
Check your email
For your security, we need to re-authenticate you.
Click the link we sent to , or click here to sign in.