The market yesterday crashed and that showed us how tentative and unsettled our sense of “normalcy” really was.
All optimism brought in by news of the vaccine was literally thrown out-of-the-window as the news of the new variant in UK spread, leading to many countries imposing bans on flights to and from UK. India too suspended flights to/from UK starting from mid-night yesterday. The markets could probably be more spooked by Maharashtra imposing night curfew, starting from today till 5th of Jan. We will not have another lockdown but night curfews and other social restrictions might happen all across.
But the BIG question is whether we need to be so spooked? Has the market over-reacted? Was it because the market was in an overbought position that it has now used this scare to sell?
On the “spooked” part – this is not the first time that the virus has mutated; it has happened all along. It is spreading rapidly probably because UK did let its guard down earlier and paying a price for it now. The same variant was reported 3-4 weeks earlier in Netherlands yet there was no such fear. So, yes, it is better to be cautious but to be scared would be an over-reaction as there is not proof yet that this mutant is more fatal or virulent than the earlier one.
On the “over-reaction” part – the market followed the global trend and reacted accordingly. This fall, if anything, does indicate the thin ice on which this entire recovery was built upon.
Yes, the market was in an over-bought position and this fall and probably weakness over this week will give everyone an opportunity to re-enter. The sense of uncertainty is back and this is bound to keep the pressure on the markets in the coming days. Till mid-Jan, we should be prepared for a more south-bound market than north-bound.
Also, this is the last fortnight of the year and typically, seasonally, during this period FIIs get onto the holiday season and year-ending mode, which means, this money slows down, almost dries up till we are well into 2021.
The much-awaited stimulus from USA, around $900 billion worth of fiscal stimulus will have a positive impact but then again, we will have to wait for the holiday season to get over.
Realistically speaking, the markets could be in a consolidation phase – earnings will take centerstage again but the overhang over the concern of the virus will dominate every other emotion.
The vaccine rollout will ultimately decide the long-term mode of the market.
The underlying good news is that there is ample liquidity and once we are assured that the virus is contained, the vaccine works on mutants too, then there will be no stopping…..