“Bear market” is perhaps one of the most prominent phrases being used on social media, in the context of global stock markets. Several of the major global indices are down over 10% from their recent high levels. Japan (Nikkei 225 -17%), US Tech (NASDAQ -12%), France (CAC40 -14%), China/Hong Kong (Hang Seng -14%), and South Korea (KOSPI -11%) are some of the most talked about markets on social media.
The Indian indices have not fallen materially from their recent highs. The benchmark Nifty is barely down three odd percent from the highs it recorded last week. Obviously, in India, the household investors are not yet worrying about the possibilities of a bear market, as for them the sky is still bright blue with few scattered cumulus clouds. Nonetheless, this phrase is gaining frequency in the personal discussions.
From my various interactions with the market participants, I gather that many of them may have a different, and often misplaced, understanding of the concept of bear market.
The most widely accepted explanation of a bear market is “a 20% or more decline in the benchmark index for a sustained period of time.” This decline in market indices is usually accompanied by growth pessimism and change in the asset allocation in favor of less risky assets. Capital preservation takes precedence over wealth maximization, as the primary investment objective.
The key elements of a bear market, therefore, are growth pessimism; and wider asset allocation shifts towards less risky assets to preserve capital by sacrificing potential gains from equity. Fall in market indices is the most common consequence of a bear market. 20% fall in indices is just an indicative number based on empirical studies of previous bear markets. It is however not a precondition for a bear market.
Bear markets can, at times, last for many years. Japanese equities witnessed the longest bear market running for more than two decades. Chinese equities are in a bear market for over 15 years for now. Bear market in the US tech stock lasted for almost a decade after the bursting of the dotcom bubble in the year 2000. In India, bear markets have usually not lasted for more than 3 years.
It is important to understand that ‘bear market’ is a fundamental concept. It is not related to technical analysis or trend analysis of the market. For technical analysts the markets are defined on the basis of the current trend in the indices. These trends (uptrend, downtrend, sideways) can change in a couple of days. At times these trends could be incongruent to the fundamental trends, thereby causing irrationalities (extreme buoyancy or pessimism) in the markets. These irrational market conditions should normally be not considered bull or bear markets.
Where do we stand?
In my view, in strict technical terms the current uptrend in Nifty50 that started from October-November 2023 has terminated earlier this week. Nifty may move in a 5 +/- band (23100-25500) for a few weeks before a new trend emerges. At present the probability of a downtrend is higher than the uptrend. In case of a downtrend Nifty50 may yield 80% to 100% of the upmove from 19080 level. In case of extreme pessimism, Nifty50 may even fall to 17800 level for a few days. This downtrend may last anywhere between 9 to 17 months.
Fundamentally, currently there is no evidence of growth pessimism, or asset allocation shift. In fact, the growth estimates are getting revised upwards, earnings buoyancy has slowed down a bit buy still a long distance from material deceleration. Allocation to equities remains strong. I shall be closely watching these trends over the next 6 months for any indication of worsening, to bother about a bear market in Indian equities.
