Markets, contrary to popular belief, are not autonomous organisms. Markets are defined by the actions of participants. Outcomes are the cumulative effect—the sigma, i.e.—of multiple moves made by a heterogeneous crowd with differing investment goals, time horizons and often also future expectations. The unexpected stock market tumble of 9 May, with the S&P BSE Sensex losing 1,062 points and NSE Nifty shedding 370 points, got analysts scrambling to decipher market signals and interpret red flags. It seemed counter-intuitive, given the popular narrative of unbridled economic growth and policy continuity.
Typically, stock markets tank when there is an immediate trigger (such as a national security crisis or natural disaster like a tsunami) or a proximate economic event (like a hike in the policy rate of interest). Last week’s market shudders amid sunny forecasts, therefore, led to some confusion over probable causes. While there is no official reason for the spike in volatility, two explanations seem plausible: Nervousness over election results and its impact on policy, and indifferent corporate results that suggest continuing stagnation in consumer markets combined with waning pricing power of leading companies. Bearish sentiment is also reflected in the derivatives segment of the stock market, as current positions indicate expectations of a further fall in indices during the weeks ahead.
The immediate concern seems to be a somewhat low voter turnout in the first three phases of the ongoing seven-phase general elections. Election Commission data for the first two phases, released on 26 April—after due revisions that generated some controversies—showed phase-I turnout at 66.1% and phase II at 66.7%. Preliminary estimates for the turnout in the third round of voting on 7 May also indicate a lower turnout than previous polls.
Market participants interpreted lower voter participation as a sign of relative political apathy, taken by some to augur fewer Lok Sabha seats for the ruling party than expected. While it appears premature to make any conclusive assessment, with half the polls still to go, nervousness over a potential upset—even if just a whiff of it—may have induced impulse selling of equities. This market twitchiness might have been aided by unimpressive corporate results for 2023-24. An analysis of 378 company results by Bank of Baroda shows that while their topline grew 9.3% in the fourth quarter of the year, profit- after-tax expanded only 5.8%.
In the weeks till the final election results on 4 June, even as the remaining corporate results are announced, markets will also try to decode another confusing signal from investor action: The rising share of systematic investment plans (SIPs) in mutual fund (MF) investments. Gross inflows through SIPs during April 2024 crossed ₹20,000 crore, the highest ever.
This comes amid other data from the government showing that net household financial savings in 2022-23 shrank from the previous year, as borrowings jumped over 70% and physical assets grew 17%. These numbers are for a period more than a year ago and so the trend might have shifted in the ensuing 12 months, but if not, gross MF inflows rising every passing month while net financial holdings diminish would create big-picture dissonance for market participants. This, over and above political uncertainty and corporate sluggishness, could also weigh on investment decisions in the near term.
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