Equity markets are thriving, and no immediate setbacks seem likely to halt India’s record-setting rally. While investors watch the benchmark indexes rally amid a mix of excitement and trepidation, they should also keep an eye out for less obvious developments on Dalal Street that could signal a longer bull run.
Bull market rises and bear market declines are part of the stock market cycle, but they don’t occur within a pre-determined time frame. Different phases of the bull market itself unfold at different times. Extended bull markets usually indicate periods of excess wealth, when stocks continue to rise despite warnings.
The current stock market situation is exhibiting many of the hallmarks of such a mature, or as some investors prefer to describe it, mature, bull market. With the bull market now in its fourth consecutive year, the Sensex and Nifty have continued to gain momentum that has surprised even seasoned investors.
The Sensex index hit the 80,000 mark for the first time last week, registering a rise of nearly 11% since the election results were announced on June 4. In 2024, the BSE and Nifty indexes have risen about 12%, while the Midcap 150 index has risen 25% and the Smallcap 250 index has risen 26%.
While the blue-chip-led rally in the major stock indexes may not be all that surprising after their relative poor performance in recent times, the long rally in the mid- and small-cap indexes in 2024 surprised many on the Street. Some investors booked profits as early as late 2023 or early 2024, as many small caps were already considered to be in prime form at that point. Many of them underestimated the strength of the market’s bullish momentum. Now they are watching stocks rise from the sidelines, with growing anxiety over missed opportunities. Many of them are asking their investment advisors whether they should consider putting a lump sum into the market to ride the momentum. In fact, some investors have been buying up shares of the best-performing public companies in the post-election slump to ride the bullish wave. One fund manager calls this “bear fatigue” and sees it as one of the soft signs of a prolonged bull market. The driving force behind the recent market surge also points to this situation. So far in 2024, fewer stocks have been driving the Nifty, Midcap 150 and Smallcap 250 indices compared to last year. For instance, in the 50-stock Nifty, 10 stocks led by Reliance Industries and Bharti Airtel contributed 73% of the index’s rally of around 2,600 points. In the Midcap 150 index, 25 stocks drove nearly 60% of the 4,178-point rise since January. A broader set of stocks led these indices last year. This was last seen in 2018-2019, when a handful of large caps led by Reliance Industries, TCS, Infosys and HDFC Bank dominated the market rally. What does this backdrop mean for investors? The maturity of the bull market does not mean that the current virtuous cycle is over. As the Wall Street adage goes, bull markets don’t end with old age. Market reversals are often triggered by economic downturns or major unexpected global events or shocks known as black swans. Most global market participants do not believe that economic conditions will worsen dramatically, primarily in the United States, despite record high interest rates in the United States. Moreover, many of them expect the US Federal Reserve to start cutting interest rates if employment data shows signs of weakening. This could be the next boost for emerging market stocks, including India. The maturity of the bull market does not mean that investors have to get out of stocks. Essentially, investors need to tweak their equity portfolios and cut risk, especially in small caps, as margins of safety continue to shrink as the market rises. Actively managed equity funds (mostly large caps) may struggle to outperform their benchmarks when there are limited market drivers. In this case, index funds and ETFs may be better options to capture the upside potential. Although black swan events, by their very nature, are not something investors can anticipate, they bode well for investors in managing risk in a prolonged bull market, even if it is difficult.
