Stock Market Crashes and Bubbles Explained – How to avoid them? | Share Market Basics - YouTube

Friends, today we will attempt to answer a million-dollar question.

That the bubbles and crash come in the stock market, can they be guessed in advance?

If we talk about data then we have seen the bursting of the bubbles that came in the past.

Whether it is 2000's .com bursts.

Or 2008's financial crisis which we call the great recession also.

In recent times, whether it is the covid crisis of 2020.

So the question arises that can we predict these types of crises in advance.

So that we can do our asset allocation nicely.

So in this video, we will try to understand that which types of indicators are these who suggest that

in the stock market whether there is a bubble or not in today's date.

And with that whatever indicators we will talk about, we will compare them with the current scenario i.e

in today's date i.e making this video in September 2021.

So we will put in that scenario also, that what is happening in the market in today's date?

Video will be interesting; stay tuned.

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Now the first question that arises is; what is the need of finding the bubbles in the stock market?

Many experts say that you should keep investing; after 20,25,30 years whenever you retire, you will get a big corpus amount.

Yes, that is also a way of investing whom we call SIP.

You keep investing regularly and you get the average returns of the market.

That ain't no wrong way either.

But those who are Pro-investors; always study the market,

they try to find if there is any big crash coming then we can avoid it in some way.

So our returns can be much better.

I will give you an example here.

In January 2008, if someone has a portfolio of Rs 100.

It was reduced to Rs 50 within the next 1 year, the market was dropped almost about 50%.

Now, coming back from Rs 50 to Rs 100 means that you want your 100% returns.

On how many days do you get 100 % returns in the market in normal conditions?

It takes 3 or 4 or 5 years.

So if we somehow can avoid this big crash then we can have our returns much better.

Now here comes the second question of the people that it has become the thing to time the market.

If we know that; when the market peaks and when it bottoms, then anyone becomes rich.

And if all this was so easy to find out, then everyone would have been rich.

Definitely, you are absolutely right. First, we need to understand that, what is meant by timing.

Here we are not saying at all that, when would the peak comes or the bottom comes, not saying that timing.

The only thing that we want to find out is that the stock market is overvalued or undervalued in today's date.

It may be possible that it can stay overvalued for enough time.

There we can take our calls at least that whether today I should invest or not.

Or I have to move my assets, or to change my asset allocation, want to move some money on gold and some in debt.

So we can take that call.

So we will be studying this and we will see what does the indicator suggest.

So let's try to understand that; how the bubbles of the stock market form and what are their stages.

First of all, understand that the stock market runs in cycles.

First comes a boom period then comes a recession period then again comes a boom period.

Suppose a recession period has just ended. After that what will the government do generally?

They will try to increase the liquidity in the market, they will put more money in the market.

If people get more money then they will spend more.

Jobs will be more.

And how to increase this money supply?

Interest rates are reduced.

So the existing conditions are been changed. So this first stage that we call displacement.

Here the interest rates are reduced for eg. it may be possible that the government is printing the money.

Like we see that in the past 1 year USA government is printing the money.

So the people have more money in their hands.

In India, we saw that moratoriums were given.

So people did not have to pay the loan instalments so they can spend that money.

So here comes our next stage Boom period.

So here the people have money and the interest rates are low, so they take more loans.

Then from that loan, they will buy a car, home.

Now if all these things will sell then there will be more jobs.

More jobs will come, a lot of people will have more money.

So there comes the more boom in the economy.

After this boom, there comes a Euphoria period.

Whenever there is too much inflation in any asset.

Now, many people will invest.

So if we talk about an example here then in 2003-04 there were also low-interest rates.

One recession period was over that was the .com recession period.

2002-03 onwards the interest rates were too low so people started putting their money in real estate.

Not only in India but there was a boom in USA's real estate sector.

In this Euphoria period, there are many new entrants, asset price inflation takes place, all the commodities;

overall inflation starts rising.

So in such a case, the government starts applying the brakes,

they start increasing the interest rate because inflation is increasing.

So when the brakes on the interest rates start to hit.

So here the institutional investors or smart investors start profit-booking.

There some money starts coming out of the market.

But retail investors and the mass public don't get an idea about this.

And when do people get the idea? people get the idea when some negative sentiments come on.

any type of mass failure or any fraud is been detected.

For eg. there was a Lehman crash in 2008, it was a big negative sentiment.

So after profit-taking, the fifth stage comes i.e. Panic selling.

When everyone want to come out from the stock market or from any asset class.

Here the covid pricked the needle in the last year, it became a negative sentiment because of which market stanked.

And these cycles go on, firstly boom period then recession then boom period then recession.

But here is a little bit of a tricky situation, here a little idea seems that the market is overvalued or undervalued.

But it is very tough to predict for what time it will be overvalued.

And here most of the experts fails.

That's why we have given you the disclaimer that we are not talking about timing the market.

We are only talking about if we feel that the market is overvalued in today's date.

So if we want to stay out of the market then we can.

Let's talk about the indicators by which we can find out the bubbles of the stock market.

The stock market itself is the first indicator in it.

And what we can study in the stock market?

First of all, we can study the current valuation of the stock market.

So if we see an eg. of what was happened before 2008 crisis.

I have plotted the P/E ratio of 2007-09 of Nifty here, which means the price earning ratio of Nifty.

Overall the earning that is coming in Nifty from the companies. How many times we are ready to give?

Here we are talking about it.

So see here that in January 2007 there was peak valuation, here P/E was going on 28.25.

If we talk about the Historical average from the past 40 years since when the stock market was working.

There the average was 18,19, 20. It is a comfortable range.

So see here that 28.25, and here we can take one more number i.e. 25 if P/E is more than that then it can be a red flag for us.

You can see that if you find out the average in these 2 years then it is near about 20 or even less than that.

Here, what is the current P/E that is going on; we will also see that.

If we talk about 2020-21 so see there was a recession at the end of March and P/E was near about 17.

But this P/E was increased if we talk about it at the beginning of the year 2021, so it was reached upto 42.

Now currently the P/E is going about 26.84. So what is the meaning of this 26.84?

It means that the people are ready to pay more premiums.

Even ready to pay Rs 120,130,135 for the item of Rs 100.

How long can it stay at the rate of Rs 130?

It is difficult to say that, but the facts are in front of us.

After that, we can see the market cap to GDP ratio.

This is also called the Buffet indicator.

Here if we talk about the historical average of India, it is near about 79,

means that the overall stock market cap of India Vs how much its GDP ratio.

If the historical average is 79.

If we talked about 2008 then it was reached up to 150.

There was too much inflation in comparison to this, which means the stock market valuations had gone up significantly.

Now if we talk about 2021 so this is going around 122 in today's date.

So of course, it is going on more than the historical average.

So here we just talk about the valuation of the stock market.

Now we can study one more point in the stock market that is;

On an average how much returns will we get or how much we can expect.

See if we talk about 30 to 40 years or the past 15 to 20 years then the stock market gives us the return of 15%.

There came a period when you got returns of 30%,40%,50% for suppose 2-3 years.

You will see after studying that every year from 2004 to 2007 the market was growing by 30%-40%.

So here; the tendency of the stock market is that it will average out.

There is such a time that when it suddenly goes into negative, then it will be averaging out definitely.

So if we feel that in today's date it has given more returns from the past time,

so we have to understand that in the coming time these returns can be negative.

So we can study these three things from the stock market.

After that, the indicator at the second number is the Bond Yield curve.

So this Bond Yield Curve is very important.

Before every recession, you will see that the Bond Yield Curve inverts.

Let us understand this; after all, what is the Bond yield curve?

See bond yield curve means that if we give money to someone in the short term;

if we earn fixed returns, get fixed returns in bonds.

You can consider the Bond Yield Curve or the Interest Rate Curve as the same.

So here, suppose if we are expecting in the short term, suppose that in the bond is of 2 years we are getting 2-3% returns.

And in the future, if we see the bond period is 20-25 years then here we will get returns of 7%.

So this is the Normal yield curve.

It means that if the bank is picking up money at 4% and for the 20-year loan it gives back at 7%. So this is a normal tendency.

And why do we have this returns expectation?

See in future, there is always a risk element because of time that; what will happen in future or whatnot?

So if I am putting money for more time, I am expecting more returns.

It means that; here the risk element is a little bit high.

For that reason, I have returns expectation is high.

And if here I talk about the short-term then the risk will be less therefore the expectation of returns will be less.

And if the bond yield curve inverts, this is the normal one, this is the normal bond yield curve which is upward sloping.

If it becomes downward sloping that is we get high returns for the short term bonds.

And in the long term, we will get low returns here suppose that if we get 4.5% returns.

Here suppose that I get a return of 6.5%. What does it mean?

It means that investor thinks that in the short term they can have a loss, the risk is high in the short term.

See here the risk is high.

So that's why the expectation of returns are high.

In this case, it seems that in future the risk will be less and I want more safety in future,

so many people start investing their money in bonds and fixed returns.

So this is a big indication that people are trying to move from the stock market to the debt market.

So here if we talk about an eg. then we take data from 2006 to 2009 to study.

So see here that in Nov 2006 the Bond yield has become negative.

This means that there were more interest rates in short term and low-interest rates in the long term.

Here the bond yield curve is inverted you can see the negative yield, for some time it becomes positive also.

But here somewhere we have got an indication.

This doesn't mean that if the bond yield curve is negative then the recession will come in the next 2-3 months.

As we talked about earlier, how long can the market remain inflated? It's hard to predict that.

But, here you can see that, we can say one thing sure short that the recession which has came in 2008,

before that, the bond yields curve became negative one time.

And if we apply this in the covid situation so here also the bond yield has been negative on 28 Feb 2020.

The bond yield curve was inverted.

Here the stock market stanked quite quickly.

It is not necessary that the market will react too quickly. The market can react after some time.

In the covid situation, everything was too fast, an economic lockdown was everywhere.

So the people reacted fast also and because of that recession comes fast.

So if we see the bond yield curve in today's date that is 2021, then it seems to be normal.

It is a normal upward sloping curve.

So in the stock market, on the one side, we can see the high valuations.

And on the second side, we have a positive bond yield curve.

So right now there is no such immediate reaction may be that all of sudden the recession will come.

So these are the 2 main indicators. One is the stock market itself and the second is the bond yields.

These are the two important indicators.

The third is the Money supply, that money is not pumped somewhere artificially.

As is happening in today's situation.

In the USA, Fed. has printed too much money and started to buy corporate bonds.

So the market has too much money inside it.

Definitely, interest rates are low and no government is increasing the interest rates in any country and not also in India.

And the third point which we talked about money supply, it is too much in the market.

Here you will say that money supply is more in the USA, so what difference does it make in India?

See if there is more money supply than that money also comes in India.

Foreign Institute Investor that we call FII. They had put a lot of money in the Indian stock market.

In fact, if I tell you the data so, $1 Trillion Dollars has gone into the Global stock market in 2021.

And if we compare this data with the past 20 years, then in 20 years, $800 Million were pumped into the global stock market.

You can guess that; how much money has come into the stock market in the last 1-1.5 years.

So from these three indicators, we can get an idea of what is going on in the market.

Other than this there are few indicators but they are Lagging Indicators.

Lagging indicators, now people will say that they will find out what is happening in the stock market through GDP.

Actually happens the opposite. All the projections of the GDP are known to all the participants.

The people who are dealing in the stock market; Do they don't read newspapers?

They know what are the projections of GDP and what is going on in the market.

So GDP reacts afterwards, that's why we can't assume GDP as the leading factor.

Secondly, people say that Unemployment is also a factor but again it is a lagging factor.

Look at the covid situation.

The stock market reacted first and then the unemployment increases.

The same thing happened in 2008, the market fell down first and unemployment rose later. So it is also a lagging factor.

Thirdly, many times people say that they can find out through the Consumer Sentiments. It can be good or bad.

When things happen then the sentiment is being made.

If the situation of the market is going well. So I will plan to buy a new car or plan to buy a new thing.

So that is my reaction to the already existing situation.

So this is also a lagging indicator.

So here we talked about three main indicators, only those are the leading indicators.

From those, you can find out what is going on in the market and what will be the direction.

So this was the only motive to make this whole video.

Other than that, we have talked about the 2008 financial crisis or 2000 Dotcom bursts;

if you want that we should do detailed videos on them then comment it down.

And what do you think about the situation of the market in today's date?

Please tell me your reaction in the comment section.

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Till then keep learning, keep earning and stay happy as always.