Can we Predict Market Corrections?

10 June, 2021

            Can we Predict Market Corrections?

Uncertainty and change are the only things permanent and common to all of us in this world.

In the last week of May 2021, the RBI put out a warning of a bubble in the market. Equity prices have been rising relentlessly since the Sensex crossover to above 50,000 levels. This rise has been attributed mainly to the money supply and foreign investments in the market. Although the improved economic prospects are contributing to this euphoria, it is clear that the impact is more due to the other two aspects. Domestic investment in our stock markets is also high as is evidenced by the opening of a million demat accounts every month, cushioning foreign outflows.

Still, by historical standards Indian markets are highly overvalued. The ratio of Sensex share prices to company earnings is now around 30 as against under 20 historically. The Sensex has been bloated by the global influx of money. But “when” they eventually exit the market, not “if”, it will lead to a correction.

Accurate predictions can be forecast, but only in more controlled conditions where many possibilities and probabilities are presented and analyzed for impact. But predicting uncertain ‘shocks’ may be a challenge.

What history has taught us

Earlier ‘shocking’ events (over the past few decades) which have impacted the economy and therefore the markets and our investments are the Harshad Mehta Scam of 1992, the 2000 Tech Bubble crash, 2008 Global market crash and meltdown and most recently the Covid 19 crash of 2020.

Bear in mind, that in the latest one, a sharp correction happened over just 7-10 trading sessions. Perhaps we need to brace ourselves for a new normal … ‘shocks’ will occur every 8 – 10 years.

And with the magnitude of its impact globally, Covid 19 brought in a lock-down and change in ways of life as we knew it. Something that we had never experienced before. Therefore, more than predicting such an event, we need to look at the consequences and actions that we took...

Its impact on our personal lives and families will indeed be most ‘shocking’ to all of us and possibly something we had never imagined would happen.

Warren Buffet’s famous quote on being able to predict stock market movement (either rise or fall) is noteworthy -

"Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere."

- Warren Buffet


The moral of the story is that yes there will be cyclical falls and rises… some more than others. As long as you continue to stay invested and participate in the market both during the rise and the fall, you should have no trouble in the long term with your financial goals and anticipated returns for your family’s safety.

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

- Warren Buffet

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.

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