What happens after a Bull Market?

A large chunk of the Stock Market investors in India have started in the last 1-1.5 years. So, most of us are not aware of what happens after a Bull Market, but given the gains we have made currently (hoping no ITC investors :P ), we all must be eager to know this.

Before I explain my points, I would just say that it somewhat follows symmetry. What rises eventually falls and what falls eventually rises.

If there is a long bull run, longer is the aftermath(slowdown). Similarly, if the market climbs quickly it also falls quick.

I would try to explain here through 4 examples from some of the prominent stock markets around the world. The first case is from

1. Japanese Nikkei

As can be seen from the graph, Nikkei peaked at 39000 in 1989, and then kept on correcting to 8000 till 2002.

Today, after several climbs and falls, it is around 30000 levels. So, somebody who invested in 1989 at the peak has not been able to recover their investment till date. Scary, right? It is a case where even SIP would fail. Graph

So, you must be thinking it won’t happen in a growing economy like India and Japan being an aging economy have not been able to recover. So, before we take our next example, let's answer this, which is the fastest large economy in the World? China, right? So, let’s look at its exchange

2. Shanghai Composite Index(SSE)

SSE peaked at 6100 in 2007 and then bottomed at 1700 during the 2008 Financial crisis. Today, despite China registering robust growth after that, in some years even in double digits, and with liquidity at all times high, it has only managed 3500 levels.

So, it is quite clear growth alone does not support the stock market rise. Liquidity and Sentiments contribute a huge part as well. And yes, for SSE 6100 looks far.

So, you must be thinking it may have happened in a controlled economy like that of China and such a thing would never happen in a liberal economy. So, which index do you think is the benchmark of an open market? Some index from the USA right? so let’s look at

3. S&P 500

S&P 500 was at 1000 levels in 1998. Then peaked to 1500 in just 2 years (2000) due to dot com boom. It then almost halved in next 2 years to 800(2002). So, loss of 200 points in 4 years.

It was only in the year 2007, it could cross 1500 levels again, and after the Housing bubble burst, it again dropped to 675 in 2008. Want to calculate the net gain for these 10 years? Scary, right?

But what is even scarier is that since then it has mostly been on a bull run ( a very long one, right?) and is now at 4400-4500 levels. ?

??Now, let's talk about our own Sensex and the impact of the famous Harshad Mehta Scam.

4. Sensex

In 1991, Sensex was at 1000, then due to some innovative tactics of one man - the “Big Bull”, it climbed to 4200 levels in 1992. But as the scam was burst, it fell back to 2000 levels.

Even though the Indian economy was liberalized and even after riding on highly positive sentiments during the 1990s, it could only touch 4200 levels in 2004, after long 12 years. Since then, Sensex has been largely, like the S&P 500, been in a bull run and today sits at 59000 levels.

While the above examples are of the indexes of some of the prominent stock markets of the globe, it must be noted indexes are safest and at some point in time do return to where they crashed. It can never be dead, though as shown in the above examples it can go on a very long and deep sleep.

But the same is not true in the case of individual stocks, where most of us tend to invest during a bull run to achieve multi-bagger returns – like Jet Airways, Reliance Telecommunications, etc, or Aditya Vision(BOM: AVL) (Familiar one?). It is a fact that stocks of even bad and unknown companies rise during a bull market and then crash, and most never see life again!

So, the Lesson of the story is simple, invest only what you can afford to lose. And be cautious. The profit that you hold currently and are happy about due to largely the bull market is still only notional. It's still not realized, nor do you have the option to realize it today, as who knows party may continue longer. But never forget the lessons of History. History does repeat itself. We got to learn from it.

Happy Investing!