While filing taxes for the financial year (FY) 2021-22, active investors had mixed feelings. If they made large gains, they needed to pay substantial taxes. But they are perhaps in loss so far, in the current financial year, because the stocks have been in a 'bear market'. It is an unpleasant feeling to have to fork out taxes for past gains while sitting on current losses. This may seem illogical but it is not surprising.
Behavioural scientists have established that we humans feel the pain of loss more than the pleasure of gain. They have also identified scores of other surprising facts about our everyday irrationality.
For instance, we are always keen to have a logical explanation for what we see around us; we are too quick to see cause and effect; we love to extrapolate and form strong opinions based on flimsy evidence; we are easily drawn to negative news and we cannot help but forecast the outcome of complex, multidimensional, ever-changing situations, no matter how many times we are wrong about it.
All these features are visible when we try to read the stock market.
These biases found a fertile ground to breed this year. Everywhere you look, people have a litany of woes to deal with today. The breadbasket of the world–Russia and Ukraine–is at war. Several third-world countries in Asia and Africa are on the brink of a disaster under the impact of inflation, mainly high energy and food prices, or economic mismanagement.
The US has reported inflation levels that were last seen 40 years ago and has slipped into a recession—defined as two successive quarters of negative growth. Thanks to its heavy dependence on Russian gas, Europe is in deep trouble.
Headlines like these are a daily staple in the media: "London only avoided a blackout last week by paying a record high £9,724.54 per MWh (more than 5,000% higher than the typical price) to briefly import electricity from Belgium."
The famed German economic engine that was pulling Europe's growth is sputtering.
On the other hand, China, which, along with the US, was the main driver of world economic growth till 2020, has been facing a severe slowdown, exacerbated by its own mistakes.
To combat rising inflation, the US and most other countries are hiking interest rates.
Rising inflation, rising interest rates and slow growth, together, act as a cold wet blanket on the stock market. That is the conventional wisdom and it is, indeed, borne out by past market behaviour.
The second piece of conventional wisdom is that when the US sneezes, emerging markets catch a cold. And yet, from a high of around 4,818 in January, the S&P500, bellwether of the US market, is down only 14.3%. Defying conventional wisdom, it is actually up 10% from a low of 3,715, even as inflation rose and the US Federal Reserve hiked interest rates.
What about the Indian market? From a high of 18,604 on 19th October last year, the NIFTY is now at 17,201, down just 7.5%, even though the four software stocks comprising the index-TCS, Infosys, HCL Technologies and Tech Mahindra—are down by 25% on average.
There are two lessons here. One, the US has sneezed but we did not catch a cold. At least, not yet. A 7.5% decline is nowhere near a bear market. It is a minor correction. However, it feels as if the market has fallen 20%-25%. Why is it so? Because of several behavioural biases that I mentioned earlier.
One, we are a magnet for negative news, a bias that gets magnified by social and traditional media. Two, we make instant cause & effect correlations—bad economic news will naturally be bad for the markets. What is wrong with that? Well, simply this.
A stock market is a market of stocks and stocks are driven by business performance, not by our anxiety about the torrent of bad news that we read everywhere.
Have we checked how this pervasive 'bad news' is affecting the actual performance of key companies? For the June quarter, Reliance Industries reported a 46% increase in net profit; ICICI Bank's net profit was up 55%; Larsen & Toubro declared a 45% increase; and Asian Paints 70% increase in net profit.
Sure, this is a comparison over the June quarter of 2021, when the Omicron wave of COVID had swept India, but if we don't dismiss the strong performance being reported by most companies as a change from the low base of the past year, we will have to stop worrying and admit things are actually much better now. We are reluctant to do that.
What I am saying is by no means a prediction of where the market is headed. We have to simply read what the data is telling us and form opinions based on data alone and not on the basis of conventional wisdom or news flows.
A relatively new theory says that markets are complex, emerging, adapting systems. Unlike in physical sciences, the basic structure of markets and interrelationships can undergo basic change, which can negate even proven notions. Human minds are not naturally adept at dealing with such basic changes.
(This article first appeared in Business Standard newspaper)
after long of great falling indian market begun to fall. but now we have to see how it has digged into
this time is different human society has make any mechanism to cushion to prevent sudden
downfall of capital market or partial or no . if the world is in the grip of recession india will not be immune anyway.