We are going through some exciting times in equity market. It has been dropping for the past few weeks and media has opened up the discussion of possible recession. I say, we are no where near recession yet. I might agree to the fact that this is near the start of a bear market. Any drop in the market you have been experiencing in the past few weeks or even months is just a correction at best. Of course there are no proper definitions for each of the terms – correction, bear and recession, but there are some generally accepted ones. So we just need to check the definitions and see where we are in the market cycle.
Generally it is considered that we are in a correction in stock market when a stock index drops more than 10% but less than 20% from the recent high. Unfortunately the definition does not say how “recent”. Should we go with 1 month high or 1 year high? What will you consider as recent? The other problem is that the definition does not say which index to use. What shall we do about that? I decided to arbitrarily take the 1 year peak as the “recent high” and the Nifty 500 to be the market index.
It is considered that we are in a bear market if an index has declined by more than 20% from the recent high for a prolonged period of time. Here also there is a lot of vagueness in the statement. Like before, we don’t know which index to use and what can be considered as recent. I will go with my previous assumptions for both those aspects. Now, what shall we do about the “prolonged period” part of the definition. How long is a prolonged period? Two months, six months, a year? Again, I will make an assumption. Lets say that the market should be in decline for at least 2 months.
The National Bureau of Economic Research (NBER) defines recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales (see the announcement). That is a big definition, but what you will immediately notice is that there is no mention about any stock market or a stock index or percentage fall from peak. The reason is that a recession is associated with economic activity (think GDP), rather than what the market thinks. Of course when the economic activity is declining, the stock price will come down too.
Where are we now?
So, given the definitions and assuming 1 year high to be the recent peak and Nifty 500 as the index, lets see where we are today (Jun 22, 2022). The 1 year high of Nifty 500 is 16,004 and today we are at 13,047. So the drop is about 18%. According to our definitions we are currently in a correction and may be approaching a bear market, but we are certainly not really there. Even if I take the recent low which is 12,855 we are still below 20%. Of course 20% is an arbitrary number and we could consider 19% or more drop as the start of a bear market. Anyway, as I said, we could be at the start of a bear market but there is nothing much else to worry.
We are certainly not in recession because there is absolutely no drop in economic activity and there is certainly no significant drop. There is a possibility that US could enter a recession in the future because of the quantitative tightening and significant rate hikes. But I don’t believe India is going to be in recession because of RBI activity. Having said that, since US economy affects every market, we could get in to recession after the US enters recession. So there is still some time.
What are the pundits saying?
Many media outlets are claiming that it is inevitable that US will enter recession. However, Janet Yellen (US Treasury Secretary), thinks otherwise. While we have seen the US stock market dropping quite a bit in the recent past there are some people like me and Seth Klarman (American investor) who think that the stocks are still too expensive.
Like I have been saying since the start of March 2022, we are not in a bear market. It is merely a correction and still is. There is absolutely no reason to waste time on such undue panic, let alone worry about it. Most of the drop is temporary and short lived. In the long run it should not matter. I mentioned in a previous post that unless the index is showing negative return over a 5 year period, I don’t even worry about it. You can also listen to the opinions of Prashant Jain (CIO HDFC AMC) on why he thinks valuations are reasonable. Although, I feel that the markets are still slightly expensive even with the 18% falls from the peaks and Sandeep Bhatia (India country head, Macquarie Group) seems to agree that India’s valuation is still most expensive among emerging markets.
Now for some more wisdom from Dhirendra Kumar (CEO at Value Research). In a recent article he writes:
I must point out that I don't really think that the word crash is (yet) a suitable description for what is happening, at least in the Indian equity markets. Even at this point - June 13, 2022 - when I'm writing this, the Sensex is positive in one year, the Nifty is negative in decimal points and the small and mid-cap indexes are barely negative.
By the standards of any of the past crashes that I have talked about, this is nothing, just a small blip. I'm not saying it can't get worse, but I believe the panic is being overdone for now.
I know some disagree with what has been said here but make of it what you will.