Various other global and national economic parameters are expected to cause market uncertainties and usher in monetary tightening.
Consequently, stocks may experience more volatility for the foreseeable future.
What are the current market trends?
The Sensex advanced about 28% and the Nifty climbed 30% in 2017, which slated a record bull run.
Also, 2018 saw a strong start but since the beginning of February, stock markets around the world have witnessed a sharp correction.
The U.S.’s decision to impose import tariffs on steel and aluminium was the latest development to infuse a sense of uncertainty.
While the poor state of health of public sector banks has added to the pain, a more broad-based decline in the markets is palpable.
Presently, Sensex and Nifty are marginally down from the initial 2018 levels.
Hence, Investors who expected 2018 to be yet another blockbuster year for stocks may have to temper their expectations.
Why is volatility expected to reign?
After the sharp correction in February, many expected Indian stocks to rebound to new highs, as in the case of previous corrections.
But the Nifty and the Sensex, which largely remained flat till recently after the February fall has now resumed their downtrend.
While it is not clear on whether this will continue or a consolidation will take place soon, investors seem willing to take risks and bet high on Indian stocks.
This belies reason as there are fundamental weaknesses like – plummeting corporate earnings, underperforming economy.
Hence, considering the irrational optimism despite the underlying risks, it’s only natural that stock prices will tend to oscillate and remain volatile.
What are the challenges?
The biggest challenge ahead for stock prices will be higher interest rates as central bankers move to rein in inflation as growth picks up elsewhere.
The U.S. Federal Reserve is expected to reduce the size of its balance sheet by $2 trillion in the next four years as it moves to let interest rates rise.
Bond yields have begun to reflect the prospect of tighter liquidity and the U.S. 10-year Treasury has almost approached the 3% mark (from 2% 6 months ago)
Many noted bond investors have confidently proclaimed the end of the multi-decade bull market in bonds, which began in the early 1980s.
Indian bond market too witnessed a sharp increase in yields recently, amid fears of faster inflation and government’s worsening finances.
Stocks markets have thus far shown minimal reaction the prospect of higher interest rates (lesser liquidity).
But higher interest rates are likely to eventually dampen stock prices, although it will continue to remain volatile.
