Is a Stock Market Crash Coming in 2024?

We recently wrote an editorial about the reasons for the fall in Indian stock market.

In a nutshell, the reasons are:

• Fears of a US recession.
• The fallout of the US Fed’s interest rate policy.
• Geopolitical risks flaring up.

These were the underlying reasons. But the cause of the massive amount of selling in such a short span of time was the unwinding of the 'carry trade' in the Japanese Yen.

Rahul Shah, co-head of research at Equitymaster, explained this in a quick and clear way in a recent editorial.

• You see, the Japanese Yen was a cheap source of money until now as interest rates in Japan were almost zero.
  
  So, borrowing in yen and deploying the capital across the globe in high-return asset classes like equities, was indeed a very lucrative trade.
  
  However, with the central bank of Japan raising rates by 0.25% and giving a very hawkish commentary about future rate increases, markets have turned jittery and are falling like nine pins.

Now the questions on the minds of investors are about the big picture:

• Is the bull market over?
• Will there be a bear market in 2024?

In this editorial, we will answer these questions...

Is the Bull Market Over?

To answer this question, we must think about the main reason behind the bull market. That reason is the huge amount money pumped into the market by retail investors.

More than US$ 2 billion (bn) every month has come into the Indian market via mutual funds (both SIPs and lumpsum), advisory/portfolio management services, and direct investments in stocks and ETFs.

Of course, an unprecedented amount has flowing into the F&O segment as well. In fact, most of the new demat accounts opened in this bull have been for the purpose of F&O trading. Very few new investors have been following traditional value investing principles.

Thus, the bull market will be under threat if the retail crowd is scared away from the market. This hasn't happened yet.

The foreign investors are already selling. The only reason the Indian stock market has been resilient, is the steady money flow from the pockets of the retail and HNI crowd.

As long as this flow of money doesn't come to a stop or worse, reverse, the bull market could continue.

But it will be difficult for the market to go up in the short term due to the negative sentiment.

The sentiment got worse over the weekend due to another Hindenburg report which put Adani stocks under pressure in particular.

Long-term investors should not be too concerned, however.

As long as you have built a portfolio of fundamentally strong stocks, bought at reasonable valuations, and are willing to hold on for the long term, you should do well in the Indian stock market.

Will There be a Bear Market in 2024?

This is a harder question to answer.

A bear market is a price correction of more than 20% from the peak of the bull market. In the case of the Indian stock market, it would be the Nifty falling below 20,000.

Bear markets can also take the form of a 'time correction.' In this case, the market can enter a rangebound phase for several months or even a few years. The price correction here could be less than 20%. Even so, such phases can be considered to be bear markets.

Is either of these scenarios likely to happen in 2024?

We can't rule them out.

However, assigning probabilities to these scenarios is next to impossible.

For example, we believe that no one in the market, however experienced, can say something like, 'There is a 20% chance that the Nifty will fall 30% by the end of 2024'.

It's best to not listen to such predictions.

The correct way to think about bear markets is to consider the valuation of the benchmark index as your guide. This would be the Nifty PE ratio.

Historically, whenever the Nifty PE ratio went above 25, it was a big warning sign of a stock market bubble, a serious correction, and even a bear market, at least in hindsight.

This doesn't mean you should be complacent if the Nifty PE is 23 or 24. We believe, a Nifty PE ratio above 20 clearly indicates that the market is expensive.

There could be specific stocks that are cheap or reasonably priced. However, whenever the Nifty PE gets close to 25, you should be on guard.

The Nifty PE has been close to 25 for about a year now. Only the strong earnings growth of the Nifty companies in FY24 kept the PE below 25.

However, the earnings growth has begun to slowdown. The June 2024 quarter has not been great for corporate India.

This makes the stock market vulnerable to a correction, especially considering the overall negative market sentiment.

But does this mean that a correction will result in a bear market?

No, not necessarily.

The defining feature of a bear market is the overwhelming negative sentiment among investors.

Put simply, investors sell their holdings in a bear market out of fear that stock prices will go down. No other reason is required.

This is not the case in the Indian stock market today.

Thus, we can conclude that as things stand at the time of writing, a bear market in 2024 doesn't seem likely. But the scenario could change if the market sentiment shifts to negative in a decisive manner.

This is something we at Equitymaster are tracking closely.

We will keep you informed.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...