Indian market witnessed its 2nd biggest one day loss ever when Sensex fell by 1448 points (3.64%) on 28th Feb, 2020 and later on much more crash in March. Many experts are saying this bloodbath in the wallstreet is because of the novel Corona virus. This was almost 8% drop in Sensex in just 2 week. Both BSE and NSE fell for the entire five days of the week ending with the worst weekly fall since 2009. Will Coronavirus Cause A Recession in India?
Investors globally are worried whether the impact of Corona Virus will shock the economies. Many companies in China are shut because the government don’t want this disease to spread more Since China is a major supplier to many countries, the supply has decreased drastically. In fact, sadly European countries are also now coming up with confirmed cases of death (21 for Italy, 2 for France). So should you withdraw your fund and get out of equity before this recession become severe or should you wait?
Before I tell you my answer, let’s have a look at some past data.
The below table shows how the US equity market (represented by S&P 500) reacted to past epidemic outbreaks.
What about Indian market?
The below table shows reaction of Indian market during last few epidemics.
Looking at this data, we can simply conclude that the outbreak of epidemic like these definitely causes concern and market to fall. However, the equity market recovers before anyone would anticipate it.
Now you’ll ask me, what if this time the Corona virus is a different case and the damage will be worst than ever?
To explain this, I’m just going to show this image that will explain it all.
If we assume that average retirement age is 60. Then the probably of working age people dying from this disease is 0.61%. Based on this research, I find it difficult to understand why the companies are shut because most of the people working are young. However, safety first and we should not take any unwanted risk.
I would still use a face mask and sanitizers and try to take all necessary actions as advised by WHO. However, if we talk money. and look at the probability part, yes there is a possibility that this single reason of Corona virus can lead to a global recession of 2020. However, that I think is merely a matter of probability and that is very low.
Hence, how do we approach this situation and what should be the next step from here?
Situation 1 – The market will recover before you realize it as the history tells us.
Situation 2 – What if this time it’s different? The market might go down even more leading to a crash.
If it’s the situation 1, then you’ll probably not have to worry and I’m sure you’re not reading this post for it
Let’s come to real discussion about the situation 2
Whenever there is a sharp decline in the market, there is a natural human tendency to sell now and enter later (to make a profit out of this situation). After reading so many books and blogs, you might think “Oh, I think I need to ignore these short term fluctuations and just focus on long term goals.
But when the market declines even more, you start regretting, what if I had sold this stock and bought at this new lower price?
Even though it’s really difficult to identify how the market would behave in future (not even serious economists or analysts can do it), let’s say you predicted the fall precisely. Which means you probably sold the stock at high price or going to sell now and the market will decline even more. Superb!
The biggest issue in getting out (selling off the stock) is to again get back into equity markets (buy at lower price). Even if you are right the first time, to get back in, you need to be right twice. And while we imagine the equity market trajectory to be a simple straight line either going up or down, there are too many false upsides during a fall.
This fools you into complacency (read as “I have seen these temporary upsides before. It will fall again. I will wait”), and when the actual recovery happens, you think it’s yet another false start and by the time you realize this one is the real one, it is usually too late and you might end up buying the same stock at higher price than you sold.
As long as you believe in this core understanding – the simple answer remains ‘This too shall pass!’
In short, my simple answer would be to not get out of the market in haste, this is what losers (or emotionally unstable people) do. Declines like these are great time to buy more. So if you have cash in hand, you can look at buying a few more of those quality stocks that you were thinking of buying from a long time.
Use some of your spare cash to buy few stocks, wait for sometime, if the market declines even more, buy those good quality stocks again at even lower price. It takes courage to do this and if everyone had it, they all would have been rich and stock market would have been efficient.
Think of it as a SALE! 20% discount! SHOP NOW 🙂
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”Warren Buffet