Today the Sensex is down 7.96%
The markets alone have declined by 23% in the last 1 month and this was one of the fastest and highest declines in the history of stock markets in India (and globally).
Many equity investors are very new to this game and many must be wondering what is going on and why are markets falling?
So in this article, I will just mention 2 big reasons that are contributing to this decline.
Reason # 1 – Fear and panic due to coronavirus
Coronavirus is the biggest cause and trigger of this huge market for the last 1 month.
The whole world is afraid of the spread of this virus and its impact on the world.
Across the world, businesses are highly affected by coronavirus. Due to this virus and the fear surrounding it, various factories shut down and work stops. Other companies that needed raw materials are not getting it and production is low. Overall manufacturing is HIT.
This also means that consumption is down and will also be down soon and it will only go up gradually over time.
A very simple example is APPLE. Its products are manufactured in China and because China’s factories are closed, the stock of apples is down because it is going to affect their profitability.
Another way to understand the coronavirus effect on trade is the simple meat/poultry business, especially in India. There has been a huge decline in demand for chicken/mutton or other similar items. Nobody is buying it. Now imagine the loss of a job, not the sale of allied products such as poultry feed by poultry farms.
Another example is the tourism industry. People are not going on holiday, or booking very few flights, etc., which is going to directly affect many companies on a deep level.
So in general different businesses around the world are affected and as you know stock markets should chase earnings. Because the future earnings of companies around the world are going to be affected, the stock markets are showing only this today.
Markets are on the lookout for news where we develop some drug or vaccine for coronavirus that gives some assurance that we will be able to control the virus and further harm will occur.
Reason # 2 – Crude Oil Price Crash
Crude oil has crashed badly in international markets.
The price of oil was reduced by about 30% in a single day a few days ago and was reduced to about $ 30 per barrel (in 1947 the price of oil was $ 28 per barrel).
It was 10 years behind at around $ 100–130 and just 2 years earlier it was in the $ 40– $ range.
The steep fall in oil prices, despite the surprising news for India, indicates a huge slowdown and low demand, as we import oil and this is going to save us billions of dollars in oil bills.
Why is it happening?
Ok, for a retail investor like you and me, this is a very complicated thing, but now you should know that there is a price going on between Russia and Saudi Arabia that triggered this oil crash. Russia did not honor its promise as per its OPEC promises and now Saudi Arabia is punishing her for going against OPEC and crashing prices which according to some analysts is not going to rise very soon.
Improvements were expected for the past several months, but the sudden rise of coronoviruses created a new level of fear among investors and caused people to crash before the crash.
The market has improved by a good margin and we have now officially entered a bear market (a drop above 20% is the market). While no one can hold down and guarantee that there may not be a greater decline, this is definitely not the time to sell your long-term money. If this was your short-term wealth, it should not have happened in the equity markets at all.
Some of the suggestions that have been made right now, some have to be partially invested, which you will not need for the next 8-10 years and be ready with some cash, so that the market falls further from here.
Disclaimer: This is a highly complex subject and I do not claim to be an expert on the matter. I have shared my opinion and my limited understanding, so please feel free to correct me at any point.