The Major Stock Indices- Nifty and Sensex fell by around 1% and closed at 17,745.90 and 59,601.84 respectively on Thursday 6th January 2021. The sectoral indices- IT and Realty were down by 1% each, whereas BSE midcap and smallcap indices ended on a flat note. So, let’s discuss what are the possible reasons behind this sudden fall in the stock market and know what should shareholders do during this condition.
Possible Reasons for Fall in Stock Market:
- The major reason behind the fall in the stock market today can be traced to the release of the minute of the Federal Reserve Meet which took place on 15th-16th of December 2021.
- The focus of the US Federal Reserve will be on inflation control rather than growth. Meanwhile, globally, the case of Omicron Variant of Covid-19 is rising very rapidly resulting in lakhs of cases a day in countries like the USA, France, and others. Here, the officials believe that being this new variant doesn’t look to be lethal as the previous variants of Covid-19, it will be focusing on inflation control.
- The solid option available for controlling inflation is hiking interest rates. And, the development of the US 10 Year G-Sec Yield rates shows a similar trend and is currently at around 1.7%. The rising interest rates of this Yield is important because it belongs to the debt-asset class, and with their rates increasing, it will be attracting Institutional Investors towards the debt asset class which will also impact the Equity class, as it might look less lucrative to these investors.
Valuation of Debt Asset Class:
- If we consider the Price to Earnings Ratio of Equity Asset Class as 40, then the yield is around 2.5%. Now, if look at the yield of 10-Year G-Sec which is hovering around 1.7%, then it can be observed that the gap between the yields of the Equity and Debt Asset Class is shrinking, and hence with the development of alternative asset classes to equity, there could be some problem in short duration.
- If we talk about the instance of the period between 2004-2008, where there was a continuous increase in interest rates, but the earning were doing very well, which also shows that Inflation is not bad all the time.
- Hence, good inflation sometimes might also add some value, and with good earnings potentials and growth in earnings.
- Talking about the levels of inflation, an inflation rate of 4%-6% is considered to be good for India, but the same is 1%-2% for the United States of America (USA).
What Should Shareholders Do?
To bring back to inflation a good level, US Federal Reserve might take the steps to hike interest rates which could impact the liquidity inflows to the equities market in the short run. Also, the year 2022 can turn out to be a Consolidation Year. Hence, shareholders need not panic and should continue their long-term investing strategies. And, if anyone wants to enter into the market now, then should follow a staggered manner of approaching and should avoid any lumpsum investment. Also, if anyone is falling asset allocation, then one should strictly stick to that approach.