The Indian stock market has been correcting in the past few months after an impressive rally in 2023 and most of 2024. The fall is keeping investors on the edge. While the downturn is significant, are we in a bear market? Or is this just a longer-than-normal correction and the markets can consolidate?
Investor anxiety is understandable amid the chatter surrounding corporate earnings expectations and slowing growth, fanning fears of benchmark indices correcting even further. But are Indian markets already in a bear phase?
This blog post will discuss what is a bear market and how you can efficiently navigate the bear market to make profits and create wealth in the long run.
What is a bear market?
Bear market, by definition, is a period of prolonged decline in stock prices. In other words, a drop of over 20% from the recent highs is categorized as a bear market.
The decline in indices is often accompanied by a slowing economy, a decline in corporate earnings, massive selling from institutional and retail investors, or a combination of these factors.
It is important to note that all price falls cannot be classified as a bear market. A sharp decline over a short period is a correction, and the market can breach the recent peaks in a matter of days or weeks.
To elaborate, a bear market is a prolonged phase of decline characterized by widespread selling, negative investor sentiment, and less-than-favorable economic data. Adverse geopolitical events such as wars, appreciation of the US dollar, and changes in trade policies of countries importing goods and services from India can all negatively impact domestic stock prices.
Let’s understand if the current decline in the Indian markets can be classified as a bear market or if we are in a correctionary phase that can consolidate in the coming weeks.
Is the Indian stock market in a bear phase?
Currently, the Indian benchmark indices Nifty 50 and Sensex are down roughly 12% from their all-time high. The Indian markets scaled fresh peaks in September 2024, while concerns around overheated valuations and high PE ratios of Indian benchmark indices amid slowing earnings growth led to the beginning of a correctionary phase.
Is the fall percentage alone enough to classify a market momentum as a bear or a bull run? Or is there more to a bear market?
Read on to learn more about the characteristics of a bear market.
What constitutes a bear market?
1. A prolonged period of decline
A bear market is classified as a prolonged decline in stock prices lasting for at least two months or more.
Indian market scenario – The decline in the Indian market has been going on for almost five months now.
2. Investor sentiment
A bear market is characterized by declining investor confidence, leading to a decrease in demand.
Indian market scenario – Retail investor confidence has not been impacted, as showcased by increasing SIP inflows. For instance, December 2024 saw record SIP inflows of Rs. 26,459 crores. The rising mutual fund SIP inflows signal retail investors’ confidence in the Indian equity markets.
In fact, the decline in the Indian stock market is attributable to foreign institutional investors (FII) pulling money out of the Indian market. The foreign investor outflows result from a combination of various factors, including the appreciating US dollar, higher interest rates in the US, and expectations of fewer rate cuts in the US in 2025.
So, while there is a decrease in global demand for Indian equity, domestic demand for investments in Indian equity remains intact.
3. Economic indicators
A slowdown in economic activity can lead to a market crash. Typically, an economic decline or downturn is characterized by rising unemployment, a fall in corporate earnings, higher inflation rates, and high interest rates.
Indian market scenario – The Indian economy is witnessing a slowdown as seen in slowing GDP growth. The corporate earnings for the third quarter also saw a decline in growth rates and stagnation in some cases.
However, it should be noted that we are only seeing a decline in growth and not negative growth rates. This means that while the Indian economy is showing signs of a slowdown for the coming quarter, GDP growth is expected to hold steady at 6.5% in 2025, as per the IMF forecast.
Evaluating the Indian equity market based on the factors mentioned above, it is easy to conclude that a combination of several factors points to a bear market. But the percentage drop from the peak alone doesn’t substantiate the claim that India is in the throes of a bear market.
Nonetheless, this bearish phase of the Indian market after a long bull run can be stressful for investors. Here are some tips for investors on how to act wisely and make money in a bear market.
Four best ways to prosper in a bear market
Wealth is made in a bear market and not a bull market
If you are a long-term investor, a bear market is a boon for you. In a bear market, investors can benefit from favorable valuations and average their portfolios. This holds good for both direct equity investments and mutual fund investments:
Here is how you can prosper in a bear market:
1. Rupee-cost averaging
Timing the market is a fool’s errand. Practically speaking, it is possible that you might end up buying a stock at a higher price. A bear market allows you to bring your buying average down by adding the same stock to your portfolio at a lower price. This will bring your rupee cost per stock down, giving you higher returns in the long run.
The rupee-cost averaging works for mutual fund investments as well. The NAV of a mutual fund decreases as markets fall. This means you will get more units in a bear market, which helps you accumulate more units quickly.
2. Portfolio Diversification
Research shows that stable large-cap stocks give almost the same returns as speculative stocks in the long run. Thus, a bear market is a good time to rebalance your portfolio if it is dominated by speculative stocks.
As an investor, you can pick blue chip stocks at a bargain in a bear market and benefit from their steady rise over the years.
You can also apply the same formula to mutual fund investments by adding more index funds or large-cap funds to your portfolio, thus balancing your mutual fund investments in small-cap and sectoral funds.
3. Careful trading and hedging
A bear market can be volatile. Volatile markets are a trader’s delight as they work on capitalizing on the market volatility, which means they can benefit in all markets—-bull, bear, and sideways.
If you are starting your trading journey, it is advisable to start small with limited risks. This will help you curtail your losses in case of an unfavorable trade. You can start with intra-day trading and move up to higher-risk trading, such as Futures and Options, as you gain confidence.
Just like investments, trading is also based on research. As a trader, you can make well-researched trades that ride the market volatility.
However, most F&O traders end up losing money in the long run. Therefore, it is essential to assess your risk-taking ability and place trades in line with your loss-bearing ability. However, F&O trading can prove to be beneficial in a volatile market if done with proper checks and balances.
Interestingly, Lemonn, one of India’s upcoming trading apps, offers a Margin Trading Facility with 4 times leverage. Seasoned traders can benefit from the MTF facility.
4. Keep your fear and greed in check
The human emotions of fear and greed induce panic buying or selling and impact overall portfolio returns and trading profitability.
Investors and traders would do well to separate their emotions from the decision-making process. This is because a falling market is not the time to cash in your portfolio, and a rising market is not the time to deploy cash.
Patience and conviction in investment decisions can save you from making hasty moves. Therefore, keep your fear and greed at bay when dealing with a bear market.
Conclusion
Equity markets are cyclical and will neither go up forever nor be in a slump forever. The average bear market lasts for about 9.5 months, while an average bull market is known to last for about 2.5 years. While bear markets don’t last as long as the bull market, real wealth is created in the bear market. Therefore, as an equity market enthusiast, you can make the most of a bear market by sprucing up your investment portfolio with quality stocks and solid mutual fund investments. You can also benefit from volatility in the bear market by placing well-researched trades with appropriate risk control measures to benefit from a bear market.
