Why is Stock Market Falling?
On 6th May 2022, the Nifty fell by 252 points. This is another day with another fall in the stock market.
The recent decline in the market has worried investors. But what are the reasons behind this fall? Let’s Find out…
- No More Easy Money:
When Covid-19 Pandemic hit, every government in the world turned on the money tap. They spent heavily to stimulate their economies during the lockdowns.
The Central banks flooded the world with newly printed money. There was so much liquidity in the economy, that the people started investing in the stock market. In October 2021, The Nifty soared to 18,500 points from 7,800 in March 2020
But now Governments are winding up their covid economic support programs. Central banks have stopped printing money. In fact, the US Fed will soon reverse the process by withdrawing the funds it pumped in. Therefore, now there will be a liquidity crunch in the economy. Thus people will invest less in the stock market and many will even try to sell the stocks.
- Rising Interest Rates:
Interest rates have started rising all around the world. In the recent RBI Monetary Policy dated 4th May 2022, the Reserve Bank of India raised its repo rate by 0.4% and cash reserve ratio by 0.5%.
The market went down in anticipation even before the announcement and crashed after it. But the reason for the crash is much deeper than a rate hike.
The yield of the 10-year US government bond is the global benchmark for long-term interest rates. It is negatively correlated with the global stock markets.
As this rate goes up, the value of stocks declines. This leads to heavy selling in the market. The 10-year US bond yield has risen from 0.5% in August 2020 to about 3% at present.
In India, the 10-year government bond yield has increased from 6.8% in July 2020 to 7.4% now. In Intraday trade it went up from 7.1% to 7.4%.
- Selling by FIIs:
Foreign Institutional Investors (FII) are among the big movers and shakers of the stock market. Since April 2021, FIIs have sold worth over $20 billion shares.
They still held close to $620 billion as of 31 March 2022. But the selling has been relentless. In January 2022, they sold $4.46 billion worth of shares. In February 2022, they sold $ 4.71 billion worth of shares. In March they sold $5.38 billion.
They have been selling Indian stocks for many months now. So much so that their holding in NSE 500 companies dropped to a 3-year low in March 2022.
Retail investors made up for this selling with their enthusiastic buying. But the selling by FIIs meant that retail investors were the only larger buyers in the market.
In other words, if retail investors stop/reduce their buying activity, the market will be having a very tough time.
- Geopolitical Risks
The Russia-Ukraine war has caused disruption in commodity markets, especially crude oil, and certain metals. The sanctions imposed on Russia will also have consequences around the world.
No one knows what will happen next and how long this war will continue? If anything, the war is escalating. Both the West and Russia have made dangerous threats against each other, including the use of nuclear weapons.
This has made global markets nervous.
The Rising prices of commodities, especially food and oil prices have caused much hardship.
The worry in the market is that retail investors, who are driving the market, may choose to cut back on spending. When inflation is high, no one wants to hold on to a stock that is not rising or worse, falling which leads to heavy selling.
- Unrealistic Profit Expectations
During the Pandemic, many companies reduced their costs and went digital. The work-from-home culture gave a boost to the trend.
Due to this many companies booked profits, especially when the lockdowns were lifted.
Many people looking into these profits sharted investing in the markets. But inflation has put an end to those expectations. Raw material costs, employee costs, transportation costs, everything is going up. This has put a cap on rising profits.
To Conclude, there can be many reasons behind the falling stock market
Individuals will have their personal reasons too. All these reasons combined have put a lot of pressure on the bulls.
Those who have cash on hand will find attractive buying opportunities in select stocks.
Finally, this is not a time for exuberance. Don't invest aggressively in the current market. Take the time to do your own due diligence on the stocks before investing.
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