Mumbai: It took 33 trading sessions for the Bombay Stock Exchange’s benchmark Sensex index to recoup all the losses from its last big fall, a 4% or 540 point decline on 28 February.
Investors will be hoping that this time around, the recovery from Friday’s 3.4% or 542 point decline will be equally swift.
The February fall was triggered by the Shanghai stock market and spread to the Dow Jones Industrial Average (DJIA) amid fears that the fallout of US subprime mortgages would spread to the rest of the economy. This time, the DJIA started off the decline and has fallen some more since the Sensex closed on Friday.
There have been four major corrections, not counting the present one, in the bull run that began four years ago. The first occurred on 17 May 2004, when worries about a change of government and a global scare about rising interest rates led to an intra-day fall of 793 points in the Sensex. Although local factors exacerbated the situation, the fall occurred in emerging markets across the world, the MSCI Emerging Markets Free Index losing 8.7% in May that year. That time, the Sensex bounced back to its pre-17 May levels as early as 24 May, but it fell after that and it wasn’t till 23 July 2004 that it closed above the closing level of 14 May, some 50 trading sessions later.
The next panic attack was a more muted one, in March and April 2005, when fears about the high US current account deficit and the impact of rising oil prices took its toll on the Sensex. This time, the benchmark index fell a comparatively tame 220 points on 15 April, but this was a different sort of correction, with the markets grinding lower over an extended period. For instance, from its close of 6,746 on 16 March, the Sensex fell to a closing low of 6,118 on 18 April and it was only by 3 June that the index was able to regain all the ground lost since 16 March.
A year later, on 15 May 2006, the Sensex plummeted by 462 points, followed by a gut-wrenching 826 point drop on 18 May. It was only on 26 September that the Sensex closed above 12,285, the level at which it had closed on 12 May, some 90 trading sessions later. This time, the ostensible reason for the fall was the higher-than-expected inflation in the US, which would mean the US Federal Reserve would continue to raise interest rates.
Every one of these corrections came from a scare, either that global growth would falter, which explained the panic attacks of February-March this year and March 2005, or that interest rates will rise and liquidity diminish, which was the reason behind the May 2004 and May 2006 sell-offs.
On each one of these occasions, the trigger occurred ove-rseas, although it’s true that the May 2004 panic was made worse by the induction of a government at the Centre that was supported by Left parties. And finally, on each occasion, the markets bounced back and went on to make new highs.
The current global economy has often been described as a not-too-hot, not-too-cold Goldilocks economy and every time there’s a threat that growth may slow (the economy becomes too cold) or that interest rates may rise (it becomes too hot) the markets get nervous. Also, merely counting the days after a big crash to recover may not give the true picture. On several occasions, the market had started falling well before the big crash happened. For instance, in 2004, the Sensex had made a new high of 6,249 as early as January and it was able to reach that level only on 30 November. In effect, a bear market prevailed from January to November, punctuated by the crash in May.
Similarly, the Sensex reached a high of 12,671 on 11 May 2006, a peak it was able to regain only on 13 October. And this year, the index went up to 14,723 on 9 February and it was only on 2 July that it was able to cross that peak. Seen from that perspective, the question to really ask is how long it will take for the all-time high of 24 July to be surpassed.