Is Markets Heading Towards recession?

[sachinu]

Lets Start by

Theodore Roosevelt famous Quote : “The more you know about the past the better prepared you are for the future”.

There are various evidences from the recent history that we are heading towards recession phase

Let us look back to history of recent previous recessions, First one 2000 tech bubble and the other 2008 financial crisis.

There are some similarities which can be drawn from previous recessions.

As you are aware every market cycle consists of 3 phases to complete one cycle:

1. Growth Phase
2. Slowdown Phase
3. Recession Phase

First, let us understand Nifty PE;
Nifty PE: Nifty PE ratio measures the average PE ratio of the Nifty 50 companies covered by the Nifty Index. PE ratio is also known as “price multiple” or “earnings multiple”
If P/E is 15, it means Nifty is 15 times its earnings. Nifty is considered to be in oversold range when Nifty PE value is below 14 and it’s considered to be in overvalued range when Nifty PE is near or above 25
The market quickly bounces back from the oversold region because intelligent investors start buying stocks looking to snatch up bargains and they do the exact opposite when Nifty P/E is in the overbought region.

Since NSE started, every time when Nifty’s Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.

Nifty PE table

Nifty PE chart

Nifty Monthly % return chart:

2000 Tech Bubble Crisis:

Here Nifty PE has reached “Overvalue Zone” i.e, above 25 and Peak was 28 During the month of Jan, Feb and March of 2000 refer( Nifty PE table)

OCT 1998, Nifty was on 800 levels and it rallied upto 1800 levels during Feb 2000, 125% returns in 15 months
and in Next 3 months Nifty corrected from top slided down 33% and again there was retracement for 2 months of 30% and thereafter further fall to 841 levels in 17 months.
So, total down from the top levels to 56% (850 levels)
Total duration of Bear market lasted for 19 months
Fig 1 Uptrend of 125%

Fig 2 Correction of 33%

Fig 3 Retracement of 30%

Fig 4: Recession Phase markets 56% down which lasted for 19 months

Fig 5: Market cycle of 35 months

2008 Finiancial Crisis:
Now, lets do similar analysis for 2008 crisis

Here Nifty PE has reached “Overvalue Zone” i.e, above 25 and Peak was 28 During the month of Nov, Dec of 2007 and Jan 2008 ( Nifty PE table)

JUN 2005, Nifty was on 2000 levels and it rallied up to 6300 levels during Feb 2000, 225 % returns in 32 months
and in 1 months Nifty corrected from top slides down 31% i.e(4400)levels and again there was retracement for 2 months of 20% (5300 levels) and thereafter further fall to 4100 levels in 10 months.
So, total down from the top levels to 64% (2252 levels)
Total duration of Bear market lasted for 14 months
Fig 6: Uptrend of 235%

Fig 7 :Correction of 30%

Fig 8: Retracement of 25%

Fig 9: Recession phase 64% which lasted for 14 months

Fig 10: Market cycle of 46 months

And Finally 2020, Health sector Crisis or Corona Crisis

Here Nifty PE has reached “Overvalue Zone” i.e, above 25 and Peak was from July 2017 until Feb 2020. (Nifty PE table

MAR 2014, Nifty was on 6300 levels and it rallied up to 12300 levels during Feb 2000, 96% returns in 75 months
and from from FEB 2020 2 months Nifty corrected from top slides down 40% and now again there is retracement happening which is presently at 24% (9291 levels) which may lead to 30% considering previous recession i.e( 9370 levels), this time retracement likely to be 50% (9976 levels)
Fig 7: Uptrend of 96%

Fig 8: Correction of 40%

Fig 9: Retracement of 25% (till now)

Considering the above analysis from two previous recessions, Now, Lets try to answer following Questions
.
Will Nifty breach previous low of 7511 or will it breach 6340 levels from where bull market started from MARCH 2014??

As per previous 2 instances, Nifty is likely to break 7500 levels in coming months. but will Nifty break below 6340 levels really we will try to figure out.

Scenario 1:
Let’s try to interpret from previous two recessions, Nifty never broke below the levels from where the growth phase started

During Tech Bubble

During Financial Crisis

So, Considering Nifty 6340 from where the growth Phase started, probabilities are one will 5.97% during tech bubble and 18% on Financial crisis
6340 * 5.97% = 6718 levels
6340 * 18% = 7481 levels
6825 level which was the low of Jan 2016

Scenario 2:
One more observation is, On tech bubble total draw down was 56% and on financial crisis it was 64%, interpreting the same for this crisis, then,
Nifty recent high was 12430, considering the draw down as 56%, Nifty may touch levels of 5520
Nifty recent high was 12430, considering the draw down as 64%, Nifty may touch levels of 4490

What will be total duration of this Bear market ?
During Tech Bubble , Bear Market duration was 19 months and on Financial crisis it was 14 months, Assuming to be lesser compared to previous recessions

And Finally, interesting thing noticed on Nifty Monthly % return chart was

During first 4 months,

2008: -17% + 2% + -9% + 9% = -15%
2020: -2% + -6% + -15% + 8% = -15%

" By Failing to prepare you are preparing to fail" -By Benjamin Franklin

Thanks For reading

[t7support]

Traders needn’t worry about market going down. They can still make money. Investors well its a good time to buy stocks at some sane valuations.

[rakesh_ahuja]

Market is only 11-12% down from top … its not a bottom… atleast 25-30% down level ( 14000 to 13000 ) might be bottom.

[t7support]

Ya market needs to come down a lot more.

[NikhilPatel]

This post is from April 2020

[t7support]

Ya but recession worries are back in 2022. Stock markets have not been reflective of the real scenario on ground.

I have seen many local business houses getting shut. Many livelihoods destroyed. Some barely kept afloat just by govt and private helping hands.

In the electronic industry at the MNC where I work we are grappling with severe semiconductor part shortages forcing us to redesign our existing products or find alternates or just buy parts at exorbitant prices from the grey market. The supply chain issues still linger even with leading tech companies like INTEL, XILINX, ST MICRO just to name a few.

Another wave of the virus I tell you isn’t going to be good for the unorganised sector or the manufacturing sector. Then there is a mindless war where no one is going to win but is going to have its ripple effects the world over. Then there is severe heat wave in the country and inflation is a real worry. If market doesn’t slip and fall to some bottom the stock market is insane !!!

[Dudgeon]

Nope. The market is always going in cycles and the economy goes in cycles too. So it’s inevitable that there will be a recession.

[Diplomatics]

When an economy experiences negative GDP growth for two quarters in a row, it is said to be in a recession. As may be seen, news of recessions continues to arrive. These are almost certainly accurate forecasts.

[trader_dude]

This is only a much required correction.

unnecessary lower interest rates caused a big rally after covid. However this was justified.

But guess what we unnecessarily lowered the interest rates even when there was no crisis and that was the mistake. from 2014-2019. you can guess why.

now would be a good time to buy.

[Swish]

No, the markets are not heading towards recession. In fact they are getting better every year. Just look at the GDP growth numbers in the last five years. They are constantly improving and recessions are not even in the picture. The economies of the countries are sound and the investments and savings keep growing, making the financial markets stronger.

[Dislodge]

Most of the news platforms are spreading the word about this. Traders should not worry much about it. They can still make money.

[SMIFS_LIMITED]

Nobody can say, where the market is headed. Markets do not reflect the ground reality all the time, instead it runs on future expectation. Right now things are not the brightest but even then one cannot say with certainty that markets will go a particular direction.

Note: These are my personal views and should not be taken as investment advice.

[Piddling]

I think the markets may be heading towards recession in the next 5 year.The recent market volatility has generated speculation that the current economic expansion is ending and the economy is heading towards a recession.