Nifty@20,000: What happens next?

The Nifty surpassed the 20,000-mark for the first time ever, a new record high. In fact, it shrugged off subdued global cues and outperformed their overseas peers. The benchmark index closed up 0.9% or 176 points.

Friday, the market continued its rally. The Nifty closed well above 20,000.

But from now on, all this will be in the past. Investors and traders are already looking to the future.

So what will the market do now? And how should investors react?

Let’s find out.

Market Optimism

‘Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.’ - John Templeton

The Indian stock markets are currently in an optimistic phase.

There is hardly anyone who has a negative view on stocks at this point. The skepticism we saw at the start of the year has been abandoned. No one expects a crash or a bear market at the moment. In fact, there's hardly a sector or theme that is disliked at the moment.

Here's what our trading guru, Brijesh Bhatia published on recently Telegram.

Excellent Broader Market Breadth

Midcaps and smallcaps have been on fire for the last few months. And there doesn't seem to be any slowdown in momentum.

In the early morning of 12 September 2023, both the midcap and smallcap indices achieved remarkable milestones, with the midcap index hitting a fresh record high of 33,245.85 and the smallcap index reaching an impressive 38,769.33.

In a recent concall with editors, Rahul Shah mentioned that the current bull market in the broader market is the strongest that he has seen. It's hard to disagree with this assessment. After all, retail investors are completely in love with these stocks.

And that’s why, in the last three months, the Midcap Index and Smallcap Index have outperformed their larger counterpart, the Nifty50, by substantial margins. While the Midcap Index and the Smallcap Index up an impressive 20%, the Nifty50 has posted a comparatively modest gain of about 7%.

The remarkable 3x outperformance of the broader market tells us that the bulls have taken over the reins completely. The momentum appears exceptionally bullish, which has prompted investors and traders to dance with midcaps and smallcaps until the music stops.

The Booming IPO Market

The primary market has come alive in recent months after going into hibernation at the start of the year due to the Adani Hindenburg saga.

A hot IPO market is a clear indication of the bullish market sentiment. Companies like to come out with their public offers when the sentiment in overall market is good.

Recently, the primary market has become a hive of activity with numerous new public offerings, and this trend is only gaining strength.

In 2023, India has secured the leading position globally in terms of the increasing number of public issues launched in theprimary market.

Regarding the issue proceeds, India holds the 8th position worldwide, with no recorded cross-border deals.

This year has witnessed 91 companies raising nearly ₹23.3 billion (bn) through the initial public offerings on the SME platforms of both the exchanges.

Notably, the capital mobilised through SME IPOs is the highest since their inception in 2012. Additionally, 23 mainboard IPOs have been launched thus far this year.

Looking ahead, the second half of the financial year 2024 is expected to see the launch of IPOs by at least 71 companies.

Many of these IPOs have delivered impressive double-digit returns, some even soaring as high as 106% since their listing dates.

What Happens Next?

Well there are two camps in the market right now.

One camp believes, we are in the middle of a new bull market. These investors and traders believe the sky is the limit for stock prices. This is the dominant camp right now.

The other camp in in a minority. They are also bullish in the long term but are cautious in the short term. This camp believes we are entering the final stage of the bull market that began after the covid crash in 2020.

Their main argument against the short term bullish sentiment in the market is the weakness in the US economy. After all, the US credit rating has already been downgraded. And as the old saying goes, ‘When the US sneezes, the world catches a cold.’

This camp believes the US is headed for a recession in a few months, early 2024 at the latest. In fact, as per this camp, most of the developed world will likely be in a recession or close to it next year. In such a scenario, stock markets around the world are at risk of a serious correction.

They point out that the US banking system is under a scanner. Many mid-tier banks have been downgraded. Credit standards are being tightened across the board.

In a consumer driven economy like the US, this is bad news. A big reason why the US isn't in a recession yet is because US consumers haven't cut back on spending…yet.

After the covid stimulus effect ended, they have not only continued to spend their regular incomes and also indulged in debt-driven spending. Credit card debt in the US has recently crossed US$ 1 trillion. This is unsustainable when interest rates are rising.

With banks already tightening their belts, it's only a matter of time before the slowdown in consumer spending hits the US economy hard. We could see that playing out in the upcoming holiday season.

And all this is on top of the US Fed's rate hikes which have already had an impact in slowing down the US economy.

Then there is the slowing of the Chinese economy too. It's now clear that the recovery in China will be slow and drawn out. The market was expecting a quick recovery. That’s not going to happen.

So if the world is slowing down, and will slow down further next year, possibly triggering a recession across developed nations, then why should stock markets go up?

This is a good point because whenever there is a recession in the developed world, money flows back to the perceived safety of the US dollar, away from emerging markets like India. This has always happened in the past. There’s no reason to think it won’t happen in the next recession.

What Should Investors and Traders Do?

Well traders should be cautious about making big trades at this time.

Sticking to strict stop losses and sound principles of money management is of utmost importance in a market which looks like its offering easy money.

It may be tempting to loosen the purse strings a little or dial back on money management but it pays to remember Warren Buffett’s timeless wisdom… ‘Speculation is most dangerous when it looks easiest.’

As far as investors are concerned, there’s only one thing we would like to say – Be prepared to buy high quality stocks if there is a correction.

And what if you're already bought fundamentally strong stocks for the long term?

Well it’s a good idea to continue holding them. It makes no sense to sell fundamentally strong stocks unless you have found a better opportunity in terms of valuations. Patience is a virtue in the markets.

In fact, consider buying more of these great stocks in a correction if you’re comfortable doing so.

We leave you with this final thought: Don't try to do everything.

If you're comfortable with value investing, don't chase growth stocks. If you enjoy swing trading, there's no need to bother with positional trading. If your strategy is focused on smallcaps, don't waste time analysing largecaps.

Know your strengths and weaknesses and play according to them. This will be especially useful when the market doesn't move the way you want it to.

Happy Investing!

This article is syndicated from Equitymaster.com