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Will the market recovery be as sharp as the fall?

The future trend in the stock market will finally get defined by the aggregate earnings expectations from individual companies in an economy.

The short answer is – we don’t know. If you have been investing for a while, you might know by now that predicting market trends in the short term is a futile activity. 

What we can instead try to analyse is the likely outcomes in the economy and in the corporate sector represented by the stock market, both in the short and the long term. This then becomes a guide towards market expectations. More than that, the future trend in the stock market will finally get defined by the aggregate earnings expectations from individual companies in an economy.

The short term problem

The lockdown across our economy, manufacturing of goods and provision of services other than essentials and travel restrictions will result in an immediate earnings shortfall across industries. Many small and medium-sized companies may collapse under the burden of this lockdown unable to emerge when things with COVID-19 settle down. 

For the moment we don’t know how long the spread of the virus infection will take to the peak. Which means there is no certainty on when the corporate world, the manufacturing industries, and the service industry will go back to the pre lock downstate. 

Even if the Government does not extend the lockdown, it is highly unlikely that things will go back to normal immediately. What this means is that as of today, it is next to impossible to build in earnings estimates for companies for the next quarter or even the next year. How fast we go back to a normal way of working and production will depend on the solutions found to fight the virus (other than a lockdown). How long this solution will take is anyone’s guess. 

Hence, in the short term, uncertainty will remain, equity portfolio values can go lower and the recovery in stock markets, amidst this uncertainty, is expected to take its time. 

In times of crisis, as with everything else, in businesses too it is about the survival of the fittest. As an investor, your focus should not be on when and how the markets will recover, rather on whether you have a good quality investment portfolio or companies which will survive through this time. 

The long term vision

However, we also need to understand that individual companies remain in operation through tough times for many decades. Companies and brands like Tata Steel, Britannia, India Hotels, TVS Motors, Birla Corp, Nerolac, Raymonds and Bata to name a few have been around for nearly 100 years or more.

It means these companies have survived through the two world wars, several political upheavals, the emergency (in India) and more recently the global financial crisis. The names above are just an example, there are several others like them. As equity investors (through mutual funds or otherwise), you invest in companies and sooner or later earnings and profitability become normal again after a crisis situation. 

In times of crisis, as with everything else, in businesses too it is about the survival of the fittest. As an investor, your focus should not be on when and how the markets will recover, rather on whether you have a good quality investment portfolio or companies which will survive through this time. 

The quality filter is not an easy one to build and if it overwhelms you or confuses you, then take the help of a professional fund manger through mutual funds. The job of the fund manager is to find good quality companies with the ability to earnings across market cycles. Your job now shifts to picking a good quality fund manager and this too is not an easy task. If you aren’t able to filter through the many fund managers to decide the most suitable manager and fund, then turn to a qualified advisor. 

The right advisor will not only help formulate the right portfolio plan for your future financial goals, irrespective of what the market may or may not do now but will also help you understand and navigate through extraordinary market events. Don’t wait to see a quick market recovery, it may not happen. Instead focus on solving the problem around quality, preferably with a reliable advisor.   


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