Do You have a Guide to Surviving Volatility ?

Market Update - Monday, 01 Dec

The markets attempted to open the new month on a positive note, with the Nifty technically hitting a new all-time high this morning. However, this was immediately followed by surprising selling pressure.

Despite the strong GDP numbers that were posted at the end of the previous week, the market failed to sustain its gains today, suggesting that the good news had already been fully discounted. No recent economic number appears to be surprising the market anymore.

Meanwhile, the Rupee continues to fall against the US Dollar. It hit 89.8 during the first half of the day before recovering slightly to around 89.5, but it is clearly headed for the 90-handle.

• As for the charts, the Nifty chart shows that the single large move three sessions ago was equivalent to several sessions of action. Post that move, the market has been consolidating at the top for the last three sessions, down -0.1% today.

• Nifty Junior was up 0.12%, Mid-caps down 0.1%, Small-caps down 0.23%, and Bank Nifty down -0.12%.

• Gold is up another 1%, trading at ₹12,967 per gram, which is very close to its previous weekly high.

• Even more dramatic is Silver, which is up another 1.9%, trading at ₹1,74,613 per kg in Indian markets. In just the last five sessions, silver has climbed more than 20%, an astonishing move in the precious metals space, which also signals underlying global instability.

• The USD/INR closed up 0.24% by the end of the day, with some reversion from the 89.8 high.

Other Market Triggers

• The Nifty heat map was evenly divided between gainers and losers, with losses in Bajaj Finance, State Bank, HDFC Bank, Indigo, Sun Pharma, Titan, Bharti Airtel, and Adani Enterprise.

• Gains were seen in BEL, Adani Ports, Hero MotoCorp, Tata Motors, HCL Tech, Tech Mahindra, Coal India, and Kotak Bank.

• The Nifty Next 50 heat map showed good gainers in Vedanta and Hindustan Zinc from the commodity space, and Hyundai and TVS Motors from the auto space.

• The Auto sector's performance is driven by the release of some good November monthly sales numbers, thanks to the festive season and the Goods and Services Tax (GST) kicking in this month.

• The next month may be a more comparable period. Conversely, there were down moves in stocks like Lodha, DLF, Canara Bank, and REC.

• In the Mover of the Day segment, Wockhardt was up 19% following the U.S. FDA's acceptance of a new drug application for an antibiotic.

• Pharma companies often experience very sharp moves due to FDA approvals or declines, making their general trend difficult to predict.

U.S. Market Update

• On the US Market front, the previous session saw decent gains of 0.5% to 0.8% across the S&P 500, Dow Jones, Nasdaq, and Russell.

• Inside the market, Intel gained almost 10% (a continuation of the trade that began with a huge gap-up in September after the US government decided to take a stake in the company), along with good gains from Meta, ConocoPhillips, Amazon, and IBM. A disclaimer is given that some of these stocks may be part of the Weekend Investing US stock strategy and are not recommendations.

What to watch next ?

• Despite the currency's depreciation, the stock market continues to reward the large-cap and Nifty players. However, the rally has not yet fully restarted for the small-cap, mid-cap, and broader market.

• The market is now keenly awaiting the RBI outcome in the coming week. There is significant leeway for the RBI Governor to implement heavy rate cuts, given the combination of strong growth and the lowest inflation seen in a long time.

• This is the ideal recipe for kickstarting the economy in a big way, and there is hope that the RBI will lower rates dramatically, which could potentially trigger the broader market rally.

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📈 Market Resilience: A Data-Driven Guide to Surviving Volatility

💡 Century of Market Drawdowns

Today, we want to share an extremely interesting data point regarding the history of market declines, or drawdowns, in the US markets. The statistics we are drawing from, credited to Charlie Bilello's account, cover an extensive period, almost a hundred years, going back to 1928. This data shows that within-the-year market declines are not just possible, but statistically inevitable.

The historical data reveals a clear pattern:

• A 1% decline has occurred in the market every single year.

• A 5% decline has occurred in 95% of the years.

• A 10% decline has occurred in 64% of the years.

As you can see, drawdowns of up to 20% are quite regular occurrences.

📉 The Deep Dips: Understanding the Frequency of Severe Declines

While minor to moderate drawdowns are frequent, the severe, double-digit declines happen on a predictable, yet less frequent, cycle. This is the crucial information for any long-term investor to internalize.

• A 30% decline or more occurs in approximately 10% of the years. This means if you are invested in the market for ten years, statistically, you will likely experience one year where the market is down by 30%.

• A 40% decline or more occurs in 6% of the years.

• A 50% decline or more occurs in just 2% of the years.

If you were to have an exceptionally long investing career of, say, 70-80 years, there's a chance you'd only see such a deep, intra-year drawdown (50%+) in perhaps one or two years. The longer your time horizon, the higher the probability you will encounter these deep drawdowns. If your experience over the last five years has topped out at a 20% decline, understand that a more severe one—perhaps a 25% or 30% drop—is statistically likely in the coming years.

🧘 Staying Power: The Investor's Premium

The key message here is about staying power. The premium returns that equity markets offer—the returns significantly higher than what a person earns by simply holding money in a bank account—are your reward for enduring this volatility. You are not just being paid to put money in; you are being paid to take the risk and withstand the emotional and financial stress of these severe declining years.

The paradox of the market is that 70-80% of people typically enter the market at its peak (in a phase of rising enthusiasm) and then panic and flee when volatility begins and the market starts to fall. These individuals miss the fundamental nature of the investment game. They become part of the "new crop of investors" who get a painful learning experience and exit. They may perform better in their third or fourth cycle after the lessons of the first and second have been ingrained.

🚀 Preparing for the Next Bull Run

We are currently in a phase where, post-COVID, we have not seen a very major down move in the past four to five years. If you feel the market has been dull or performance has been lacking over the last 12-18 months, view this period as a preparation stage for the next major move.

Do not become complacent or discouraged by the sideways action. This is the time to remain invested, fine-tune your strategy and ensure it is robust enough to automatically capture the future market leaders (the "winners of tomorrow").

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