Stock markets likely to find near-term bottom on Tuesday

Dow Jones Industrial Average has fallen 32% in a month

Stock market indices, including India’s Sensex and Nifty 50, are likely to find their short-term bottom today, after a savage correction on Monday in both the Indian markets as well as US markets.

The Dow Jones Industrial Average suffered another massive setback on Monday, dropping by a massive 13% to 20,188.

With this, 30-stock US benchmark has fallen a whopping 32% over the last month or so from its peak of 29,551 on February 12.

In comparison, India’s benchmark Nifty 50 index is down only about 26% from its peak of 12,362 hit in mid January, indicating that some more pain may be in store for Indian markets today.

However, most of the Asian markets are trading in neutral territory, and the SGX Nifty — a derivative based on Nifty 50’s value — is trading at a level that indicates that the Nifty 50 is at around 9250 points, indicating a slight gap-up opening for the Indian index over Monday’s close of 9,197 points.

As of 0730 IST, the Dow 30 Futures is at 20,900 — implying a gap-up opening of over 3% over Monday’s close for the US markets.

Nevertheless, it is very likely that the Indian market will see some volatility today, given that it has fallen only 26% compared to 32% for the Dow index.


Even if the Nifty gives up another 500 points (6%) today, both the Indian and global stock markets are likely to find their near-term bottom today.

In other words, most of the bad news that can emerge in the near term has been priced in, including a prolonged Coronavirus infection in the US lasting all the way up to July-August, as indicated by US President Donald Trump in his late afternoon press conference.

US stocks started dropping massively just as he was saying that it likely that the virus infection could take up to July-August to ‘wash through’ his country.

Stock markets are correcting as investors believe that containment measures aimed at arresting the spread of the virus will bring down economic activity by a significant extent, and push the world into a recession.


Nevertheless, any virus-induced recession is likely to be of a short-term nature, unlike a ‘structural recession’ like the one seen in 2008-09, when imprudent lending practices led to a near-collapse of the banking system in the US.

What is more worrying are underlying weaknesses and imbalances in places like India, where the economy was already struggling even before the virus was ever in the picture.

Even in the US, many realists and pessimists have been warning about dangerous levels of debt in the economy.

Debt levels in countries like the US and China have gone through the roof over the last ten years as central banks have been pumping trillions of dollars into the economy to spur investment and consumption.

The US Federal Reserve, for example, has pumped nearly $4 trillion into the financial markets by purchasing bonds from other financial institutions over the last 12 years.

The massive influx of liquidity has been driving the prices of assets like stocks, real estate, bitcoin and even art, into uncharted territories. It has also led to what many call unsustainable levels of consumer debt, including credit card debt and student debt.

Any signs of stoppage or reversal of this so-called policy of ‘quantitative easing’ has been associated with sharp pullbacks in the value of these assets.

This has in turn forced central banks to quickly return to easy money policies, as they fear that a correction in asset prices could lead to a ‘reverse’ wealth effect that can affect consumption and lead to a recession.

Before Coronavirus came up on the scene, it was believed that central banks would continue to pump in massive amounts of money into the global economy until they were forced to stop by rising prices of essential items.

It was believed that eventually, the inflation trend would spill over to prices of items such as food and manufactured goods, forcing central banks to stop pumping cheap currency into the markets.

This decision on the part of the central banks to stop printing currency would then lead to a massive correction in asset prices as well.

The risk facing someone who invests in the market today is the prospect of the Coronavirus correction leading to a pricking of the massive stock market and other asset bubbles that have been carefully built up over the past decade, leading to a larger meltdown.