A sharp 1,400-point fall in the stock markets on Monday brought to the fore the concerns of investors about the virus continuing to exist around them and at the same time about the otherwise rising trend in the markets. Although investors have been reaping the benefits of the rising markets, there has been a bit of anxiety around a broader sense that the markets are running ahead of broader economic fundamentals. The fall in the markets did not extend beyond Monday, however: stability returned quickly alongside a fund flow by foreign portfolio investors.
While the fall was driven by concerns around a new, more potent variant of the coronavirus, investors must keep in mind that such mutations are only to be expected during the course of the pandemic, and it is important for them not to panic. While day traders need to react to such news flows and square off their positions or cut down their losses, there is no such compulsion for long-term retail investors. They need to just wait out that market volatility.
Why was there panic?
The sharp 37% fall in the Sensex and Nifty between February 1 and March 23, 2020 is still fresh in investors’ memory, and hence there will be concerns around any fresh news about Covid-19 or a new virus strain that can impact our lives and hurt the economy, which are otherwise slowly returning to normalcy. So, when news broke of the new coronavirus variant and countries started announcing travel restrictions to and from Britain, the first reaction was one of fear, which led to the sharp fall in the markets on Monday. At one point, the Sensex was down by over 2,000 points or 4.3% over Friday’s closing, in line with a 2-3% drop in European markets on Monday.
Even as investors have been riding the high tide, there is a feeling that the markets are running ahead of the broader economic fundamentals and the GDP recovery is still a work in progress. This has been keeping many of them on the edge, and some are even going for profit booking. Though profit booking is a good idea, investors must do that only if they want to go for asset reallocation or want to utilise the money to meet certain goals such as buying a car or a house, or kids’ higher education. Booking profits with the idea of re-entering when the market is down may not work out.
So, how should you take the news around Covid?
In February and March 2020, Covid-19 was a new unknown. As research started detailing the potency of the virus and market participants and investors started seeing its impact on human life, their livelihood and the economy — including travel restrictions, lockdowns, social distancing, closure of offices and near halt of industrial activities across countries — the markets started reacting to it more vigorously. However, as the months progressed, the world found a way to live with the virus, scientists developed at least four vaccines (till date), economic activity resumed, and markets bounced back. The excess liquidity in the global markets (initially meant to support the respective economies under duress) also found its way into stock markets worldwide and lifted them higher and faster than expected.
Amid all the anxiety, the news of a new more potent virus variant on Monday brought back the memories of March and investors pressed the panic button. It is, however, important to keep in mind that Covid-19 or a new strain is no longer an unknown; we have all gone through the drill and learned to live with it over the last nine months. So there is no cause for pressing the panic button. A retail investor needs to analyse the situation carefully before taking a call to exit, and even before exiting, he or she must figure out the options for deploying that fund.
Why should you not panic?
When in doubt, investors should simply refer to the two biggest events that the markets faced over the last 12 years — the global financial crisis in 2008 and the pandemic in 2020. Both impacted the markets worldwide. If the impact of the global financial crisis was limited largely to the finance industry globally, the pandemic continues to have a much deeper impact and has hit every life in some way or the other.
So what do these episodes tell us? During the 2008 crisis, the Sensex lost 41% between September 1 and October 27, but then regained its August 2008 closing level of 14,500 after nine months i.e in May 2009. By the end of December 2009, the Sensex was up 20% over the index closing value in August 2008.
Similarly, although the Sensex lost around 37% between February 1 and March 23, 2020, it regained its previous high level — over 41,000 in January 2020 — around mid-November. Currently, the Sensex is trading at 11% higher than the highs it had seen in January 2020.
Investors should always remember these two events and their impact on the markets. Short term crash events do have a bearing on day traders, but for retail investors, there is no reason to panic.