Does current drop in stock prices indicate a bear market? Here's what investors should do now

The steep decline in stock prices in the past few weeks has led to fears of a bear market.

ET Wealth examines how far these fears are valid and what investors should do.

20% decline in major indices is considered a bear market. Some indices have dropped more than 20 percent, but the benchmarks have not fallen so much.


10% decline in indices is only a correction. However, if the downtrend continues the correction may soon give way to a bear market.

I. Mid- and small-cap segments in bear hug
Large-cap indices are in the correction zone but mid & small-cap stocks have declined significantly.

Despite the deep cut, the 5-year returns of the mid & small-cap segments are well above the returns generated by large-cap indices.

Figures in the bars denote % fall from the 52-week high

II. Some sectors have fallen more steeply
Real estate stocks and PSU banks fell over 40% while some (like tech) declined only 10-15%.

Private banks managed to cushion the fall in the banking sector. Bank Nifty declined 12% from its 52-week high

Figures in the bars denote % fall from the 52-week high

III. 1-yr SIP returns in the red
The deep cut has brought down small-cap stocks to 2015 levels.

Long-term investors should look at this as an opportunity.

Figures in the bars are 1-year SIP returns of the indices

IV. Sectors are a mixed bag
While some are in red, other sectors have done well in past year

Figures in the bars are 1-year SIP returns of the sector indices


V. Valuation still above average
Despite the cut, major indices are trading above 10-yr average

VI. But below the average PB
In terms of book value, valuations are below 10-year average.

VII. Biggest losers
The decline has wiped out most of the gains made by these scrips in the past five years.

VIII. Not so big losers
But the recent downtrend has not made a big dent in the long-term returns of some stocks.

IX. Worst performing diversified equity funds
The one- and three-year returns of these diversified schemes are deep in the red. Only schemes with an AUM of at least Rs 100 crore were considered for this analysis. Sector and thematic funds and index schemes were also left out.

Data sources: BSE, NSE, ETIG database and ACE MF Data as on 25 Oct 2018