Why this market crash could be healthy after all!

This stock market crash although triggered by unfortunate circumstances could turn out to be healthy when we compare different segments of the stock market

Published: March 12, 2020 at 1:37 pm

At the time of writing Nifty is 6.28% down having recovered a bit after 11 am (Mar 12th 2020). While it is not possible at this stage to call this as a “correction”, a “reaction”, or a “crash” (this would require hindsight bias), we are witnessing a rare event. Nifty has fallen more since Jan 1st 2020 than NSE Midcap and Smallcap Indices. This could be healthy for the market overall.

As on Mar 11th 2020, Nifty 50 has fallen -14% from 1st Jan 2020 (-19.8% as  1pm 12th March 2020). Since some define a 20% fall as a “crash” were pretty much there. Nifty Midcap 150 8% as on March 11th and Nifty Smallcap only 9.33%. This is shown as a normalized plot below.

Normalized movement of Nifty 50, Nifty Midcap 150 and NIfty Smallcap 250 from Jan 1st 2020 to March 11 2020
Normalized movement of Nifty 50, Nifty Midcap 150 and NIfty Smallcap 250 from Jan 1st 2020 to March 11 2020

The gap would probably have considerably closed today. Nonetheless, it is striking that large cap stocks have fallen more than mid or small stocks. Those closely watching the markets would probably say, “about time too”.

Ever since the midcap and small cap segments began to fall after budget 2018, it is well known that only a few Nifty and Sensex stocks held the large cap indices, so much so that Return difference of Nifty 50 vs Nifty 50 Equal-weight index was at an all-time high as on Dec 20th 2019.

That is NIfty 50 Equal Weight Index return was significantly lower than Nifty 50. The highest ever. Notice how much this situation has significantly corrected since 1st Jan 2020. Again this gap could have considerably closed when the markets close today.

Normalized movement of Nifty 50 and Nifty 50 Equal Weight from Jan 1st 2020 to March 11 2020
Normalized movement of Nifty 50 and Nifty 50 Equal Weight from Jan 1st 2020 to March 11 2020

Although the reasons that triggered this fall are unfortunate, this correction among different segments of the market was inevitable, dare I say necessary and a long time coming.  From that point of view, this is indeed a healthy development.

Going forward it would be interesting to see how active large cap funds fare. 

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