Nifty vs S&P500

October 25, 2023 3 min read

Is the Stock Market Poised for a Recession?

The stock market is always a topic of interest, and one question that many investors ask is whether the market is poised for a recession. In this article, we will analyse the current state of the stock market, particularly the S&P 500 & the Nifty 50 indices, and discuss its potential for a recession.

Before delving into the details, let’s take a look at the current position of the market. As of now, the market is standing at around 4,200, while its peak was at 4,800. This means that we are currently about 10-15% lower than the highest point. At first glance, the market might not appear extremely weak, as it is still hovering around the 200-day moving average.

It is interesting to note that this economic situation is occurring amidst discussions of an impending recession. However, when we compare the market with the Nifty, a broad-based stock index in India, we can observe that things seem to be going relatively well. The Nifty is only about 3-4% above its 200-day moving average. Therefore, given the performance of global markets, we are not significantly far off from where we should be.

Considering this perspective, it is worth mentioning that while some weakness is expected once the official recession is announced, it is unlikely that we will suffer significant losses, especially on the Nifty. Over the past two years, the Nifty has been consolidating within a specific band. Recently, a breakout occurred, leading to a rally from 18,400 to about 20,000, which accounts for a little less than a 10% gain. While we have given up about half of this gain, it does not necessarily indicate that we will experience a drastic fall.

Our belief is that we will consolidate in the current range, taking some time, and then proceed with the next leg up. This suggests that we are more likely to see a period of stability before the market makes its next move.

To gain a deeper understanding of the current weakness, it is crucial to consider the context in which it is occurring. The US tenure yield has been flagging and is on the brink of a breakout. If the India tenure yield follows suit and rises to around 5%, it may present some challenges going forward. This could potentially lead to a longer consolidation period. However, at present, there is no need to be overly pessimistic about the future of the market.

Historical data supports a more optimistic outlook. When we review past instances where the Nifty has reached or dropped below the 200-day moving average, we observe rapid recoveries. Even during the exceptional case of the COVID pandemic, the market bounced back within a year. This trend suggests that any time the Nifty has collapsed below the 200 DMA, a recovery has followed within a relatively short period.

Overall, based on the current proximity to the 200-day moving average on the Nifty, it seems that we are in a reasonably fair and safe position. The probability outlook for the next year appears favourable, considering the historical trends and the speed of recovery following market dips.

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    Nifty vs S&P500