October heat wears out bulls. Will this bottom fan a new rally ahead?

Despite the festive season, October has brought a chill to the Indian stock market, with bulls struggling to gain traction. Even last October, the Nifty 50 index went down a little over 5% and closed below the crucial 20-period weekly moving average. This October, the Nifty has corrected around 7%, and October 25’s closing at 25,250 is below the 20-period weekly moving average.While the Indian stock market has experienced an impressive rally in 2024, with benchmark indices such as the Nifty 50 posting gains of over 20% at its peak, the index has always taken support at this 20-period weekly moving average. Last October, when it closed below the crucial level, it marked a significant bottom, and a new rally started. Will the pattern repeat this year as well?Only time will tell.Let’s delve deeper into the factors contributing to the recent market correction and explore potential implications for the future.Geopolitical turmoilGeopolitical tensions and market volatility have soured investor sentiments. The surge in mid- and small-cap stocks, fuelled by foreign fund inflows, has reversed course as FIIs (foreign institutional investors) continue to be net sellers.October has seen a record-breaking outflow by FIIs of over ₹76,000 crore from Indian equities, surpassing the ₹62,000 crore worth of shares sold in the March 2020 sell-off during Covid.The recent escalation of tensions in West Asia has sent shockwaves through global markets, with oil prices experiencing sharp volatility. As fears of a wider conflict grew, crude oil prices surged, impacting various sectors, and ultimately leading to a sell-off in Indian equities.India, being heavily reliant on imported oil, is particularly vulnerable to rising oil prices and has exacerbated concerns about inflation and economic growth. medium114717624US rate-cut hopesForeign investors are pulling funds out of Indian markets and shifting their focus back to the US. The Dow Jones Industrial Average and Nasdaq are hitting new milestones, while the Nifty 50 has retreated over 7% from its all-time high. This shift is fuelled by a renewed belief in the value of US markets, coupled with recent positive developments.Since the US Federal Reserve cut interest rates by 50 basis points on September 18, the 10-year Treasury has gained 59 basis points. Ideally, this should have been bad for stocks. But still the S&P 500 gained 3.8% during the same period.Part of the reason is that credit risk is rising in the US but Warren Pies, a trader, says traders had taken a bet on recession and purchased long-dated bonds as an insurance against recession. The move of the 10-year Treasury from 3.6% to 4.25% is the unwinding of recession insurance buyers.Basically, the Fed’s move along with housing data has lowered the odds of a near-term recession in the US. “IMO, at 4.25%, the 10-year is at a low end of a fair value,” Pies posted on X.Strong third-quarter earnings from US banks and growing optimism about a potential interest-rate cut by the Federal Reserve in November have boosted investor sentiment. Additionally, signs of moderating inflation are further encouraging US investors to allocate more capital to equity funds.Data from LSEG reveals that US equity funds attracted a substantial $20.08bn in net purchases during the week ending October 16, following inflows of approximately $3.98bn the previous week.BlackRock Investment Institute has maintained a preference for stocks over bonds, a strategy that has paid off this year as equity markets have reached new heights. Despite concerns surrounding AI investments and recession risks, US stocks have outperformed other regions due to strong earnings growth and surging tech valuations.“Uncertainties about high valuations and the US election could lead to market fluctuations. However, over the next 6-12 months, we remain bullish on US stocks, anticipating double-digit earnings growth and declining interest rates,” BlackRock said in its report. medium nocaptionhttp://youtu.be/vtOzEcFj6rU?si=qFDaetjh-0tlDgQMThe China factorAlso, China’s recent stimulus measures, including interest-rate cuts, have diverted foreign funds away from India. The allure of more attractive valuations in China, coupled with concerns about overvalued Indian equities, slower earnings growth and a potential economic slowdown, has contributed to FII selling.Motilal Oswal Financial Services recently forecast a mere 5% year-on-year earnings growth for Nifty 50 companies in the September quarter, the lowest in 17 quarters.Early financial results for the September quarter indicate a slowdown in India Inc’s revenue and profit growth. The combined net profit of 197 listed companies fell to 6.1% year-on-year in Q2 of 2024-25, down from 27.4% in the same period last year.According to Bank Baroda Research, this decline is primarily attributed to increased expenses and input costs during the quarter.Race to the White HouseThe upcoming US election is not an ordinary event. The race between Donald Trump and Kamala Harris is tight, but the latest national polls show Harris holding a narrow lead over Trump as they gear up for the election on November 5.In 2016, the S&P 500 gained about 6% in the six weeks following Trump’s win. Over his entire term, the S&P gained 57%, compared with 48% so far under US President Joe Biden. However, even though there could be short-term volatility, experts believe the market will settle down soon and adjust to the outcome.Experts point out that Trump’s economic policies could lead to higher inflation. He wants to put tariffs on imports, which would make foreign goods more expensive, and he is pushing companies to produce more in the US, which could also increase costs.Historically, lower interest rates in the US have correlated with increased demand for riskier assets. This often leads to capital inflows into emerging markets, including India. However, this shift might not occur immediately.According to experts, the US election introduces uncertainty. Once the political situation stabilises, we could witness a resurgence of risk-on sentiment in markets like India, they opined. Lower interest rates make riskier assets more appealing to US investors, potentially driving a return of foreign portfolio inflows into Indian markets.While valuations have been a concern, strong domestic investor interest could support elevated valuations. A significant market downturn is unlikely unless geopolitical tensions escalate into a full-scale war, triggering a broader flight of global capital.