Can the Stock Market Crash in 2024?

After a correction in early 2023, the Indian stock market has been on a for most of the year. This is especially true of the broader market comprising midcaps and smallcaps.

Also, the resilience shown by the benchmark Nifty, in the face of global financial market volatility this year, has been remarkable.

In fact, these days, the market bulls don't even expect serious corrections. They don't fear them either.

The market sentiment is overwhelmingly positive. IPOs are back in the primary market, retail investors are busy looking for the best penny stocks to buy, and SIP flows into equity mutual funds are rising.

In such a scenario, it's not surprising that no one is talking about a correction let alone a bear market.

But in this editorial, we will do just that...

The Main Premise of a Market Correction in 2024

First things first. The main reason is not the possibility of a government change.

Even if that happens, the markets will recover sooner than most people expect. One look at the speed of the market's recovery after the 2004 election results should provide comfort.

Another point we would like to make is that any correction in 2024, will not change the long-term upward direction of the market. As long as India keeps getting richer, the markets will go higher.

The main reason for a correction in the market will the ongoing bull market itself.

Yes, that's right. The bull market itself will cause a serious crash. This crash could even turn into a bear market if there is a US recession in 2024.

But why do we say this?

Well market veterans know something that most investors either never realise or understand only after a big crash or bear market.

Huge losses in the stock market are almost always because retail investors ignore either the fundamentals or valuations (or both) of the stocks they buy.

In other words, retail investors fall prey to the following mistakes.

• They buy low quality stocks or stocks with big risk factors and think they would be fine in the long term due to the company’s growth prospects playing out.
• They buy highly overvalued stocks, like high PE stocks, and think it wouldn’t matter in the long term because the expected price appreciation.

What many retail investors fail to realise is that a rising market makes them feel these mistakes don't exist. This is because rising stock prices hides these mistakes. Rising prices create the illusion that investors have made the right decision.

This prevents retail investors from selling junk stocks at the right time. They hold on to them expecting ever higher returns, convinced they have made a good choice buying that particular stock.

Warren Buffett explained what happens next better than we can...

• 'A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street (a community in which quality control is not prized) will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.'

This will be the main reason for a market crash in 2024 if it happens. The trigger - an adverse election outcome, a recession in the US, a war, a banking crisis, or anything else - will be the justification.

Market veterans know that the justification is never the reason for the correction. It's the reason mentioned publicly by investors, especially institutional investors, when they dump the stocks held in the funds that they manage.

Winners and Losers

Investors who don't sell at this time are the ones who will suffer the most.

They realise that prices are falling because of the fear in the market. As there are also likely to be fearful at that time, they will also sell, most probably at a loss.

This will only take prices even lower, triggering even more selling.

The investors who benefit the most will be the ones who have cash on hand to invest in high quality stocks when the fall to attractive valuations.

Conclusion

We at Equitymaster would like to caution readers about the stock market soaring to new highs in 2024.

This is not because we're against short term profits. It's because the higher the market rises; the higher will be the market's valuation.

And the higher the valuation; greater would be the probability of a big crash or a bear market.

The Nifty's PE ratio is around 21.1 at the time of writing. If were to rise to around 25 or above it, the chance of a correction would increase significantly.

However, long-term investors shouldn't be too concerned about this. As long as you're invested in high quality stocks, stay away from speculation, have a good amount of cash ready to deploy in case of a correction, you should do fine.

All you need then is a solid watchlist of fundamentally strong stocks.

Use Equitymaster's stock screener to build your watchlist.

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...