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    Perfect recipe for mega selloff was in the making, says Madhav Dhar

    Synopsis

    A sudden fall in the market is not the knee-jerk reaction to any global event.

    BSE---BCCL-2
    The BSE Sensex has already wiped out entire gains made in 2018, thanks to a 3,000-point crash seen from its all-time high of 36,443 hit last Monday.
    NEW DELHI: A sudden fall in the market is not the knee-jerk reaction to any global event. A 'perfect recipe' was in the making much before the mega selloff.

    The closest analogy to what happened on Monday is what happened in 1987 when the US economy was very strong and then US President Reagan cut taxes, said Madhav Dhar of GTI Capital Group

    Reagan tax cuts refers to the changes made to the US federal tax code during his presidency. On December 22 last year, US President Donald Trump signed the Tax Cut and Jobs Act (TCJA) into law, making a few major changes to the US tax code.

    "Interest rates have been rising for one-and-a-half years now, which nobody seems to have paid any attention to. Markets were 40-45 per cent on an average in last 15 months. You had tremendous price extension, rising interest rates, tremendous enthusiasm and extremely stretched valuations. That is usually recipe for something very bad to happen in the markets,” said Dhar.

    The BSE Sensex has already wiped out entire gains made in 2018, thanks to a 3,000-point crash seen from its all-time high of 36,443 hit last Monday. The market crash came even as Jerome Powell was sworn in as new chairman of the US Federal Reserve.

    In its recent policy review, the last for Janet Yellen, the Fed had noted that inflation on a 12-month basis is expected to move up this year and will stabilise around the 2 per cent target over the medium term.

    With the US economy doing well, chances are that the US Fed may go for more rate cuts than the market was anticipating. Besides, US bonds yields too were rising, giving equities a run for money.

    “One thing I have learned over the years is that markets historically average out to earnings,” said Rahul Arora Chief Executive Officer at Nirmal Bang Institutional Equities.

    “We saw this in the six years preceding the last leg of the bull run that began in December 2016. Between December 2010 (NBIE had just about started) and December 2016, the market and earnings CAGR for those six years was about 5 per cent. So why should it be any different now? Don’t we buy companies for earnings and growth?,” Arora asked in a letter to clients.

    Arora said not even one institutional investor he spoke to was comfortable with market valuations, and yet 99.9 per cent of the sell side was still bullish. Calling the situation bizarre, he said the fall over the last 72 hours has restored some sanity in an otherwise senseless linear move in the market.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

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