There are two types of bear markets. The first is a shallow one. A sharp fall initially, but then the subsequent selloffs are less intensive. Everything gets resolved in four to five months. For almost a decade, India and the rest of the world have got used to this kind of a bear market. The second kind is a deep bear market, which arrives in instalments, making despairing new lows over months and, sometimes, years. These are interrupted by powerful rallies, each upswing offering just enough encouragement, until aftershocks appear from nowhere to puncture their optimism again. Each time the market is in a deep dive, investors have to judge: Are we in a shallow or a deep bear market? The answer depends on how much of the trouble is from a single source. If it is (as was president Trump’s tariff war), it would be a shallow bear market because a single-source problem usually gets fixed. If the sources of problems are complex and locked in a vicious cycle, as they were in the global financial crisis of 2008, which affected too many institutions and countries, it would be a prolonged bear market. Is the Gulf War the complex type?
The war centred on Iran has already delivered the opening sequence. Oil prices have jumped, equities have slumped (March was the second-worst monthly decline after the global financial crisis; the worst being the COVID shock in March 2020). Will the shocks be short-lived? Consider how such episodes tend to unfold. A negative shock—financial, geopolitical or otherwise—forces a repricing of risk. Prices fall sharply. But markets are forward-looking: they do not dwell on present misery so much as they anticipate future relief. Any hint of stabilisation—a central bank intervention, a diplomatic overture, a pause in escalation—can trigger a rebound. Short-sellers cover positions; bargain hunters return. Prices rise, sometimes briskly.
At this stage, the media starts quoting experts saying 'the worst is over'. However, a new wave of negative information arrives. If investors conclude it is new and surprisingly bad, the fragile confidence erodes again. Prices fall further to fresh lows. The cycle repeats. This jagged descent was on full display during the global financial crisis. The markets fell heavily in the first quarter of 2008, only to rally in April on the back of policy support. The rescue of Bear Stearns was taken as evidence that the worst had passed. It had not. Losses in the banking system continued to mount. At this point, crude oil prices suddenly climbed sharply, hitting a high of US$147 in early July, pressuring equities all over again. Then came the failure of Lehman Brothers in September. A wholesale panic liquidation started by October and hit a firm bottom in March 2009. Each rally appeared, at that time, to mark a turning point. Each proved illusory. Even in July 2008, the NIFTY rose a sharp 7% as oil prices dropped from their peak.
The relevance of this history lies less in the particulars than in the pattern. Prolonged bear markets are not smooth. Prices rise and fall as investors debate whether the worst is over. The longer uncertainty persists, the more pronounced these oscillations become. In the present conflict, the most immediate channel is oil. The Strait of Hormuz remains a chokepoint for global energy flows; even a partial disruption has pushed crude prices higher. At first, markets tend to treat such spikes as temporary. Energy shocks, after all, have often faded as quickly as they appear. But if elevated prices persist, they begin to alter the macroeconomic landscape. Energy feeds into transport, fertilisers, manufacturing and, ultimately, food. What begins as a commodity shock becomes a broader inflation problem. Central banks, already wary of resurgent price pressures, find their room for manoeuvre constrained. An easier monetary policy risks fuelling inflation; a tighter policy risks choking growth. This is the first way in which things can go wrong: the shock can prove sticky. Inflation can settle at a higher-than-expected level, forcing a repricing of interest rates. Bond yields can rise. If so, equity valuations will fall in tandem. Markets that had been counting on relief must adjust to restraint.
The second risk is that disruption spreads through supply chains. Modern production systems are efficient but brittle. Energy shortages, shipping delays and input scarcities rarely remain confined to one sector. Firms respond defensively: they hoard inventories, delay investment and conserve cash. What begins as a supply problem becomes a confidence problem. Growth slows, not abruptly but persistently. The third channel is financial. For large energy importers, higher oil prices strain external balances and weaken currencies. Capital flows become more volatile. Risk premia rise. In such an environment, even modest shocks can have outsized effects, as markets adjust to a world of tighter liquidity and higher uncertainty. Fortunately, this time too, the source of our troubles is just one—the unilateral war unleashed on Iran by Israel and the US. The US can end it as quickly. Once it does, supply can adjust while policy-makers work to offset shocks. Investors are currently working with this scenario. If the US wants to forcibly open the Strait of Hormuz, probably the type-2 bear market will reveal itself, arising from a complex and long-drawn conflict.
(This article first appeared in Business Standard newspaper)
Compared to 20 years back, supply chains are far more resilient. Sure, bottlenecks will be there but the impact of the shocks are less 'violent' due to newer markets, transparent pricing, and far more downstream (and upstream) distribution than before. I feel that market participants haven't fully factored in how much improvements there has been in worldwide supply chains (and a lot of it have seen compounded improvements even in so called 'third world' countries i.e. Africa).
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