The Indian share market has been experiencing a prolonged downturn, with stocks continuing to decline over an extended period. The ongoing downturn is largely attributed to the tit-for-tat tariffs imposed by the US and China‘s retaliatory measures, sparking concerns about a potential global recession.
However, some experts think the Indian stock market has become a bubble over time and is now in the correction mode. A bubble in the stock market is a situation when market participants drive equity prices to an overinflated value in relation to some system of stock valuation.
In March 2024, the then Chairperson of the Securities and Exchange Board of India (SEBI) Madhabi Puri Buch, also talked about the bubble or froth in the Indian stock market. “There are pockets of froth, sections of froth in the market,” she remarked, adding, “Some people call it a bubble, some may call it froth. The question is, it may not be appropriate to allow that bubble or froth to keep building. Because if it keeps building, it will burst, because by definition, bubbles burst. So, when they burst, they impact the investors adversely; so, that’s not a good thing.”
The current major correction in Indian equities can be seen as either a cooling of froth or the bursting of a bubble. India’s benchmark indices, Sensex and Nifty50, reached their life-time high in September 2024. Since then, Sensex has corrected over 12,100 points, whereas the Nifty50 is down over 3,600 points. On April 9, the Sensex closed at 73,898.12 points, where the Nifty50 ended the trade at 22,399.15 points.
How A Share Market Bubble Burst Caused The Great Depression?
One of the biggest economic crisis in the history is perhaps “The Great Depression”. The Great Depression devastated economies around the world. The crisis hit the US the hardest. One of the biggest economic crisis in the world began with a massive stock market crash that sent Wall Street into shockwaves and wiped out millions of investors.
If we look back at history, we’ll find that after the influenza pandemic, the US economy expanded rapidly in the 1920s, more than doubling in size. This period is termed as “the Roaring Twenties”. The iconic stock exchange on Wall Street in New York City witnessed people from all walks of life, from wealthy investors to everyday individuals like chefs, put their hard-earned savings into the market, hoping to grow their wealth. As a result, the stock market expanded rapidly, reaching its peak in August 1929.
By this time, production in the US had fallen and unemployment was on the rise. Additionally, the agricultural sector of the economy was struggling due to drought and banks had a large backlog of debts. The US economy entered a mild recession in the summers of 1929 as consumer spending declined. On the other hand, stock prices continued to surge.
As the share market bubble reached its breaking point, the market began to plummet. Panicked investors rushed to sell their overvalued shares, triggering crashes in the stock market.
Bubble Burst
On October 24, 1929, known as the “Black Thursday”, a record 12.9 million shares were sold, and five days later, on October 29 or “Black Tuesday”, nearly 16 million shares were sold. Moreover, millions of shares became worthless.
The then US President Herbert Hoover continued to assure people, but the conditions worsened over the next three years. Industrial output of the country fell by more than half. In the mayhem of 1930, investors lost confidence in their banks’ solvency and demanded cash from their deposit accounts. Thousands of banks seized to exist in 1931, 1932, and early 1933.
Hoover’s administration tried to support the banks with government loans, but the plan had very little impact on the US economy. By 1932, approximately 15 million people (20% of the population) in the US were unemployed. Under these circumstances, Democrat Franklin D. Roosevelt (FDR) secured an easy victory in the presidential elections.
FDR exuded a quiet energy and optimism. He took immediate action to address the nation’s economic crisis, including legislation for bank reform, legislation to protect the stock market against unexpected events, and programs such as the Tennessee Valley Authority (TVA) for farming and dam construction, and the Works Progress Administration (WPA) for permanent jobs.
Hence, the 10-year-long “The Great Depression” finally met its fate, and the American economy continued to ride on the bull for several decades.
Lessons From The Past
Legendary American investor Bill Miller once said, “It has been well and correctly remarked that the only things that go up in credit crisis and financial panic are correlations and volatility.”
We can draw valuable insights from history, and here are a few key takeaways:
- With swift and decisive action, crises can be mitigated or even transformed into opportunities for growth and advancement.
- Not every bubble that forms will have a pleasant outcome. Some will inevitably burst, leading to unpleasant consequences. All that glitters is not gold, and so was the case with the roaring 20s.
- Each and every investor should know their risk taking appetite and should invest accordingly.
- Governments across the world should come up with stronger legislations to protect the stock market against unexpected events, which could wipe out a fortune of investors.
- Advancements are necessary, but it’s equally important for establishments and individuals to recognize when a bubble is forming and take corrective action before it’s too late.
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