Reasons for the Decline in the Stock Market

Reasons for the Decline in the Stock Market: The Indian stock market continues to decline. Today, on November 14 too, the market has declined, and so far the Sensex is trading 266 points down at 77,690.95 and the Nifty is trading 116 points down at 23,559.05.

Earlier, on November 13 also, the Sensex closed 984 points down at 77,690.95, while the Nifty closed 324 points down at 23,559.05. Now the question is why is this decline happening? Let us know the main reasons behind this.

1. Volatility between rupee and dollar

A major reason for the decline in the stock market is the weakness of the rupee against the dollar. The dollar index rose on November 14, which increased the pressure on the Indian stock market.

After the US election, the strength of the dollar and the increase in bond yields have created a crisis situation in the emerging markets. This has had a direct impact on the Indian rupee, due to which the market is witnessing a decline.

2. Selling by foreign investors

Foreign investors (FPIs) are continuously selling Indian stocks. So far in November, ₹23,911 crore has been withdrawn. Large amounts of selling were also seen in October.

The reason for this selling is that the focus of foreign investors has now shifted from the Indian market to Chinese stocks, as the Chinese government has announced some incentive measures.

3. No change in interest rates

The Reserve Bank of India (RBI) has not made any change in the interest rate, while the situation has worsened due to rising inflation and weakening of the rupee. This has created volatility in the market and confused investors, which is further aggravating the decline.

4. Weak quarterly results

Quarterly results of Indian companies are also coming weak. According to a Jefferies report, 63% of the 121 companies have reduced their earnings estimates during the July-September quarter. This means that the performance of companies is getting worse than expected, which indicates an economic slowdown and this is causing the market to decline.

What do the experts say?

VK Vijaykumar of Geojit Financial Services believes that investors should keep in mind when the current economic conditions will improve. He has advised that sectors like cement, metals and petroleum refining should be avoided as there is a possibility of recession in these sectors.

At the same time, investing in sectors like banking, digital companies, pharma and IT can be safe, as good growth can be seen in these sectors.

Causes of a Stock Market Crash

Speculation:

Many market collapses can be attributed to excessive speculation. The 1929 Crash was a stock market speculative bubble in general. The early-2000s tech stock crisis followed a period of excessive investment in dot-com businesses. Furthermore, the 2008 crisis might be related to investor speculation in real estate (and banks enabling the practice).

Excessive leverage

When things are going well, leverage (sometimes known as “borrowed money”) might appear to be a valuable instrument. For example, buy 5,000 worth of stock and it climbs 20%, the buyer will profit 1,000. If he borrowed 5,000 more and purchased 10,000 worth of the same stock, he would make 2,000, doubling the gains.

Leverage, on the other hand, may be quite hazardous when things are going against it. Assume if an identical 5,000 stock investment plummeted by 50%. It would hurt but still have 2,500. If one borrows a further 5,000, a 50% decline would have wiped him out. When things go wrong, excessive leverage may cause downward spiral inequities. As prices fall, businesses and investors with a lot of debt are obliged to sell, which drives prices further lower.

Rates of Inflation:

Economically, higher interest rates indicate greater borrowing costs, which tends to slow down purchasing activity, causing equities to fall. As a result, if the 30-year mortgage rate rises to, say, 6%, it may significantly halt the housing industry and cause homebuilder stocks to fall.

Political Environment:

Markets like stability, but wars and political risk are the polar opposite. When there is uncertainty in the surrounding the next moves of the investors are spooked.

Tax Changes:

Deduction from the tax base of that portion of nominal income resulting from inflation. The nominal taxable income remains unchanged while the real taxable income falls with this technique. As a result, it will compensate for the consequences of inflation.

These can be only a few of the huge reasons, but it is mostly a combination of more than one factor.

Interaction of Bull Market, Bear Market, and Stock Market Bubble

A stock market collapse typically occurs when the economy is overheated, inflation is rising, market speculation is rampant, and there is significant uncertainty about the path of an economy. As a result of these factors, the stock market fall frequently begins as a trickle and finishes as a disaster as investors seek a quick quit or exit option. It might fall in unfavourable ways due to the strong interplay of the bull market, bear market, and stock market bubble.

Bull Market:

It occurs when investors are bullish on the market and the economy, as well as when demand exceeds supply, leading to a surge in share prices. It might persist between 2 and 9 years. All it takes is a big market event to spark a confidence crisis and attract additional sellers to the market.

Bear Market:

It frequently evolves following a stock market crash. In this case, investors become gloomy and begin selling shares, causing prices to decline as supply begins to outstrip demand. It is referred to as a bear market when the stock market loses 20% of its value in 52 weeks. It usually lasts for four years or fewer.

Stock Market Bubble:

It inflates and explodes when investors adopt a herd mentality and buy stocks in large groups, resulting in inflated and unreasonably high market values.

Effects of the Crash:

A stock market crash can result in a bear market, which occurs when the market falls by 10% or more after a correction, for a total drop of 20% or more. A stock market fall might cause a recession. If stock prices fall substantially, corporations will have less capacity to grow, resulting in insolvency. A demand reduction eventually leads to less revenue, which causes more people to be laid off, thus the decline continues and the economy collapses, leading to the formation of a recession.

conclusion

There are many economic and global reasons behind the decline in the Indian stock market. Issues like instability between the rupee and the dollar, selling by foreign investors, weak quarterly results and rising inflation are putting pressure on the market. In these situations, investors need to be cautious and take investment decisions as per the advice of experts.