Have the right expectation

A Historical Anomaly

The current market environment is extraordinary. For the past 53 months, the Nifty 50 total returns index has not experienced a 5% decline from a close-to-close basis. This is a remarkable feat, especially when considering that such declines were commonplace in the past.

A Decade of Frequent Corrections

In the decade between 1999 and 2012, the market typically experienced at least one 5% decline every 10 to 12 months. This pattern of corrections was a regular occurrence, and investors were accustomed to them. However, the current market has defied this historical norm.

The Impact of Quantitative Easing

The unprecedented lack of market corrections can be partially attributed to the massive amounts of money injected into the financial system through quantitative easing. During the COVID-19 pandemic, the Federal Reserve printed trillions of dollars, which has led to a surge in liquidity. This excess liquidity has provided a strong support for asset prices, making it difficult for markets to experience significant declines.

The Potential for a Correction

While the current market environment may seem stable, it is important to remember that past performance is not indicative of future results. The prolonged absence of a significant market correction is a statistical outlier, and it is possible that a correction could occur at some point in the future.

Preparing for a Potential Market Downturn

It is prudent to be prepared for the possibility of a market downturn. By understanding the risks and developing a sound investment strategy, individuals can better navigate potential market volatility. While it is impossible to predict the timing or severity of a correction, being prepared can help to mitigate its impact on one’s financial situation.

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