Don’t touch your face/don’t touch your stock. Or else you might catch Coronavirus/loss in stock market. This is the time when investors are getting serious, it’s the possibility of a recession for this decade. When the market goes down at record level (8% in a day on 12-MAR-2020 for Sensex and Nifty and hits lower circuit limit). Is this just a market crash or severe recession like 2000 or 2008 in India? These two words are often used interchangeably but there’s a huge different. Today’s post is about list of recession and market crash in India in last 20 years and my analysis for them.
Sensex was already down 25% in 1 month. The number of cases for Coronavirus (COVID-19) is increasing day by day. Profits for companies are reduced, offices are shutting down, malls and public places are closed. Airports are empty and stock markets are down. Fear everywhere. There is no clue on how do we get out of this situation. Do we call it a recession?
There have been times in history when there was a serious market crash but no recession (like the 2000-01 dotcom crash). Sensex suffered more than 50% loss during that period but the economy was still performing decently. On the other side, there have been times when there was a recession and market reacted appropriately as per the recession (around 50% drop in overall market).
I might be too early in this post to include the impact of Coronavirus in the list. However I have listed down both, the list of Indian stock market crashes and the recessions in last couple of decades. The percent drop from the last high and the duration for each one of them. Starting from the biggest stock market fall in India to the lowest stock market crash due to recession.
List of Recessions Since 2000 in India
This is something you might already know. Both the recessions were disastrous but the one with more damage was 2008-09 when the Sensex fell 61% from the last high. Remember, this is index falling by 61%, not just a stock. Stocks can react more or less based on its riskiness. If a stock is more risky then it might lose more than 61% during that period.
Companies with high debt (high debt to equity ratio) or cyclical industries (companies selling luxury goods, automotive, construction, heavy equipment and airline industries) performs worst during a recession. Some may not even survive if the recession stays for prolonged period as they have to pay interest and bear fixed costs even if they don’t earn profits. This is why stocks are said to be the most riskiest of all asset class as they tend to react the most during a financial crises.
If we do a little analysis, we’ll realize that on an average, the broad markets fall around 50% or more during a recession. Hence if you plan to invest in stock or a mutual fund based on Equity Market, you shouldn’t be surprised if you see your investment becoming half at some point in time during your investment horizon. If you can’t resist this pain, equity is not for you. Because selling at this time gives biggest loss.
Mutual funds are slightly less riskier than stocks because a fund manager is constantly tracking the portfolio and will reduce the number of companies with high debt and fixed cost during these times. However, if you invest more during this time of recession, you might double it very soon. More about the recovery part below.
Let’s look at the data for Major Corrections now
This is an interesting one. There were 6 major corrections in last 20 years. I’m only including the corrections which were little more than 12%. Today, no one remembers this market crashes and stories about them.
An interesting thing worth mentioning is that the market takes almost same period of time to recover as it took to go down in almost all the cases including recession. However, the real challenge is to predict the actual bottom to invest and take advantage of golden opportunity.