Learning Lessons from the Past

The current market downturn has shaken investor confidence, particularly among those who entered the equity markets during and after the corona virus-triggered pandemic. Many are struggling to make sense of the correction, but it’s crucial to recognise that market movements are cyclical—rallying at times, correcting at others, and often testing investors’ emotions. By analysing past corrections, we can draw valuable lessons to navigate the current situation with clarity and confidence.

One of the most pressing concerns among investors today is whether we are close to the bottom of this correction. A data-driven approach offers insights into the breadth and depth of the decline. Examining past market cycles—2016, 2018, 2020 and 2022—reveals that corrections are never uniform. They take time to stabilise and usually end when a strong trigger event emerges. Currently, nearly 90 per cent of the stocks have delivered negative returns since October, and about 40 per cent of them have corrected more than 25 per cent, indicating a significant shakeout.

This mirrors the corrections of 2018 and 2022, but what sets the current phase apart is the broader damage sustained by Mid-Cap and Small-Cap stocks, while Large-Caps have remained relatively resilient. The 2022 correction, triggered by the Russia-Ukraine conflict, was more of a bull market correction where most of the stocks managed to stay above their 200-day moving averages. Leadership stocks emerged stronger, leading to a swift recovery. Even during the pandemic-driven crash in 2020, the markets saw a steep, rapid decline followed by a V-shaped recovery, fuelled by global liquidity.

In contrast, the 2018 small-cap and mid-cap rout resulted in a prolonged, grinding correction, where the winners of the previous bull cycle struggled for years. The 2016 correction, sparked by the U.S. elections and Brexit, led to a temporary shakeout but was quickly reversed once the market found stability. The current correction appears more severe than 2018, but it lacks the sheer panic and speed of the 2020 crash. Given the extent of the market breadth damage, this suggests a slower recovery that will require patience.

One of the biggest risk factors today remains the U.S. Dollar Index (DXY), which has surged from 98 in early October 2024 to 110 by mid-January 2025. It has since corrected to 107, and if it continues to decline, we may see signs of stability in the market. Historically, strong market bottoms have formed in response to decisive triggers. In 2019, corporate tax cuts ignited a rally in Indian equities. In 2020, global central banks injected liquidity, leading to a sharp recovery. In 2022, a shift in the U.S. Federal Reserve’s policy helped the markets rebound.

For the current cycle, a potential turning point may emerge once American policy directions become clearer, the dollar stabilises, and global liquidity conditions improve. I believe it will take a couple of months. Market corrections often present good buying opportunities, yet many investors hesitate to act. History has shown that patience and strategic buying during such phases yield strong long-term results. Investors should consider building positions gradually rather than deploying all their capital at once. Identifying stocks with strong fundamentals and sound technical patterns is crucial—blindly buying stocks that have fallen sharply can be risky.

Certain large-cap stocks that have underperformed in recent years are now showing signs of accumulation, offering better risk-reward opportunities. While corrections can be painful, they are necessary to weed out market excesses and lay the groundwork for the next rally. Both time and price corrections play their role in market cycles, and the key is to stay informed, remain disciplined, and take advantage of opportunities as they arise. Until next time, invest wisely but gradually. We will soon be back with more market analysis and guidelines for both existing and potential investors.

RAJESH V PADODE
Managing Director & Editor