Market Meltdown: Understanding the Factors Behind the Recent Stock Market Crash

The Indian stock market witnessed a significant downturn on Thursday, with both the Sensex and Nifty experiencing sharp declines. The Sensex fell by over 1,000 points, while the Nifty slipped below the 22,000 mark, marking one of the most substantial single-day losses in recent times. As investors grapple with uncertainty, several factors have contributed to this market turmoil and stock market crash. Let’s delve in!

Factors contributing to Market Turmoil:

Election Uncertainty:

The ongoing general election has injected a sense of apprehension among investors. Despite expectations of a victory for the incumbent government, concerns linger regarding the margin of victory. Lower-than-expected voter turnout in the initial phases has added to the unease. The fear of a weaker-than-anticipated majority for the ruling party has fueled volatility in the markets.

Strong Selling Pressure:

Key constituents of the benchmark indices, including HDFC Bank, Asian Paints, and Larsen & Toubro (L&T), witnessed substantial selling pressure. L&T, for instance, saw a notable decline of 6%, contributing significantly to the overall downturn. Such sell-offs in major stocks exerted downward pressure on the indices, exacerbating the market decline.

Negative Global Cues:

Global markets, too, have experienced some turbulence, further impacting investor sentiment. Ahead of crucial announcements such as the Bank of England’s interest rate decision and US initial jobless claims figures, international markets witnessed slight declines. The Stoxx 600 index in Europe remained relatively stable, but indications of potential dips in US stock markets added to the prevailing apprehension.

Q4 Results Impact:

The release of fourth-quarter results by major companies has also played a role in shaping market sentiment. Disappointing earnings reports from companies like Asian Paints and Hindustan Petroleum Corporation (HPCL) contributed to the overall pessimism. While Asian Paints reported a marginal increase in net profit, it fell short of analysts’ expectations. Conversely, HPCL witnessed a significant decline in year-on-year net profit, further dampening market sentiment.

Foreign Portfolio Investors (FPI) Selling:

The persistent selling by Foreign Portfolio Investors (FPIs) has added to the downward pressure on the market. FPIs offloaded equities worth billions of rupees, exacerbating the negative sentiment. Their substantial divestment within the first week of May underscores the cautious approach adopted by foreign investors amid prevailing uncertainties.

Sectoral Performance:

The market turmoil was reflected across various sectors, with notable declines seen in multiple indices. Nifty PSE emerged as the top loser, falling by 3.41 percent, followed by Nifty Oil and Gas and Nifty Energy indices, which dropped by 3.15 percent and 2.97 percent, respectively. Additionally, sectors like Nifty Infra, Nifty FMCG, and Nifty Metal saw declines of more than 2.5 percent. However, Nifty Auto bucked the trend, closing in the green with a gain of 0.78 percent.

Impact on Midcap and Smallcap Stocks:

The pressure on midcap and smallcap stocks was more pronounced compared to largecap markets. The Nifty Midcap 100 index fell by 927 points, or 1.85 percent, to 49,109, while the Nifty Smallcap 100 index declined by 465 points, or 2.83 percent, to 15,995. This disparity highlights the heightened volatility and risk aversion among investors, particularly towards higher-risk assets.

Market Volatility Index:

The India VIX, a measure of market volatility, surged by 6.5 percent to 18.20 levels, marking its eleventh consecutive session of gains. The sharp increase in volatility underscores the prevailing uncertainty and risk aversion among investors, further exacerbating the market turmoil.

Analysis of the Factors Behind the Downturn:

Several factors have contributed to the recent market downturn, including election uncertainty, strong selling pressure in key stocks, negative global cues, impact of Q4 results, and selling by Foreign Portfolio Investors (FPIs). The ongoing general election has injected a sense of apprehension among investors, while disappointing corporate earnings reports and global economic uncertainties have further dampened sentiment.

Investor Sentiment and Outlook:

The recent stock market plunge has rattled investor confidence, prompting many to adopt a cautious stance. As the election season unfolds and global economic uncertainties persist, investors are likely to remain vigilant. The coming days will be crucial in determining the trajectory of the market, with investors closely monitoring developments both domestically and internationally.

HappyWise’s Perspective:

The recent weakness in equity markets can be attributed to the anticipation surrounding the impending election results, which has led to uncertainty for both Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs).

Additionally, there is hesitancy stemming from uncertainty regarding the inflationary environment in the US, delaying potential rate reductions by the Federal Reserve. Despite the current volatility, markets are expected to trend upwards in the long term once the election results are settled.

Advice from HappyWise:

At present, we recommend maintaining the status quo with existing investments and awaiting the outcome of the election to gain more clarity before making further investment decisions.

References:

1. Investors lose Rs 7.3 lakh crore as Sensex plunges over 1000 points, Nifty at 21,957.50

2. Sensex crashes 1,062 points, Rs 7 lakh crore investor wealth eroded