A time correction in the stock market is a lot like sitting on an airplane that is stuck in a holding pattern, awaiting clearance to finally land at your destination. In both cases, there is a temporary pause in activity. In the case of a flight stuck in a holding pattern, the plane is not moving towards its destination as quickly as it was before. While in a time correction, the market is not moving as quickly as it was before.
While time corrections can be frustrating for investors, it’s important to remember that it is just a temporary phase of the market. Just like an airplane in a holding pattern, the market will eventually return to its normal course of action.
What is a time correction?
As you probably already know, a price correction happens when the market experiences a sustained drop in prices over a short period of time. In contrast, a time correction is a prolonged period of stagnation, where the market trades within a narrow range.
Unlike in a price correction where the losses are apparent as the value of your investments take a hit, the damage done by a time correction is rather implicit and can be thought of in terms of opportunity cost. Instead of being invested in the stock market which has been stagnant, an investor could have instead invested in a simple FD and earned a near risk-free 6-7%.
Nifty 50 – rangebound for 20-months
The Nifty 50 has been trading in a relatively narrow band of +/- 10% over the last 20 months as the focus of markets around the world shifted to sticky inflation and signs of slowing growth as the post-pandemic euphoria wore off.
It could be argued that the markets had become overheated and ran ahead of their fundamentals in the nearly year-long bull-run where Nifty 50 climbed from levels of around 12,200 in Nov-20 to 18,500 in Oct-21, gaining 50% in less than a year. Since then, the Nifty 50 has delivered a paltry gain of just 1.8%, causing frustration to a lot of investors.
Earnings catching up – light at the end of the tunnel?
The 20-month long time correction has resulted in the valuations becoming a lot more comfortable as earnings have continued to improve. The Nifty 50 now trades around 22x PE on a trailing twelve months basis, down from 28x seen in Oct-21. This means that not only is the market a lot more in-line with historical valuations as earnings have caught up, the premium of India over other emerging markets like China, South Korea, Taiwan, etc. has also come down significantly.
The fundamentals are looking a lot better as valuations have become more comfortable and inflation is showing early signs of easing. Adopting a data driven wait-and-watch approach, the RBI and the US Fed have opted to pause on rate hikes over the last few weeks. At the same time, economic activity in India has remained strong and high-frequency indicators like are showing robust growth across sectors.
The Nifty 50 made a fresh all-time high to close at 18,826 on 16-June-23, but will the momentum sustain this time? Only time will tell.
Wrapping up
The Nifty 50 has been trading in a relatively narrow band of +/- 10% for the past 20 months, but with improvement in earnings, the valuations are looking a lot more comfortable now. At the same time inflation is showing early signs of easing, and major central banks have opted to pause on rate hikes (at least for now).
Though a time correction can be a frustrating experience for investors, it is important to remember that it is usually a temporary phase and the market tends to come out of it eventually. Those who are investing for the long-term should remain unfazed as this is just part and parcel of investing in stock markets.
This article was covered by ET on 30th June 2023
Author: Raghav Avasthi
Co-author: Mahavir Kaswa
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