These days the color of the stock market looks completely red. Sensex and Nifty 50 have fallen about 14 percent from their recent highs. There is an atmosphere of panic everywhere and investors are worried seeing the decreasing value of their portfolio. Whenever there is any geopolitical upheaval like war, major terrorist attack or epidemic across the world, its first and sharpest impact is on the stock market. But, if you are thinking of selling your shares fearing this fall, then wait. The picture is not as scary as it appears. Market history shows that such deep crises are always followed by a strong recovery and investors who remain patient during this period get excellent returns in the future.
understand market behavior
Well-known investor and Founder and CEO of Equity Intelligence India Porinju Veliyath has shared some very interesting statistics on the social media platform ‘X’. These figures make it clear how the market behaves immediately after any major crisis. Be it the Gulf War, the 9/11 terrorist attacks on America, the bankruptcy of Lehman Brothers or the recent Covid-19 pandemic, every time there has been massive selling initially due to fear and uncertainty.
At the time of these developments, the Sensex fell from one point to more than 30 percent. If we look at the Lehman Brothers crisis of 2008, during that time the Sensex had fallen by about 29 percent. At the beginning of the year 2020, when Corona virus engulfed the whole world, within just one month a huge decline of about 37 percent was seen in the Indian market. This is the time when there is maximum panic in the market.
Spring returns as soon as the uncertainty subsides
History is witness to the fact that as soon as the initial atmosphere of fear begins to subside, stability begins to return to the stock market and the period of recovery begins. If we average out the historical data shared by Porinju Veliyath, the picture looks quite positive. Just three months after any such major shock, the Sensex has seen an average recovery of more than 10 percent.
As time passes, this comeback becomes stronger. Within six months the average return of the market increases to around 17 percent, and by the completion of nine months this figure reaches around 26 percent. The mathematics behind this spectacular recovery is very simple. During huge decline, shares of many good and strong companies start becoming available at very cheap prices (valuation). As soon as the situation becomes a little normal, investors return to the market to buy these cheap shares, due to which the pace of recovery becomes much faster.
same pattern of history
Be it the Asian financial crisis, the Kargil war, or the European debt crisis, every time the market has shown the same pattern. First there is a big fall and then gradually the market stands on its feet. In many cases, the market not only recovered its entire fall but also gave excellent returns to investors within a few months.
What this simply means for investors is that taking any hasty step in times of geopolitical crises can prove to be harmful. Those with a long-term view should see these sharp declines as an opportunity. This is the right time when good and strong stocks can be included in the portfolio at cheap prices.