Sensex, Nifty: Key lessons from 2008, 2020 stock market selloffs

Sensex, Nifty: Asian markets recovered on Tuesday a bit after a broad-based selloff, even as the Wall Street indices settled about one per cent lower overnight. The ongoing trade tensions driven by US President Trump's tariff policies are exerting significant pressure on global markets, reminiscent of the crises seen in 2008 and 2020. This has raised concerns that the markets may be entering a new phase characterised by global growth apprehension and the potential for capitulation.

This is unlike the post-Covid corrections (2022 and 2024) where global commodity prices were stable, but liquidity tightening caused havoc, Nuvama Institutional Equities warned. 

"In the near term, markets should brace for volatility and investors should focus on capital preservation. Earnings yield minus bond yield (average of US and India 10Y) is a good guide for inflection point. Typically, during risk-off, equities tend to undershoot sharply (1SD cheap). Today, equities are still 1SD expensive compared with bonds," Nuvama said.

The broking firm said Trump’s tariffs seem to be wrecking Pax Americana rather than reordering it. It said US high-yield bond spreads have widened 75–100 basis points post tariffs. Such a synchronous sell-off in risk assets occurred only in 2008 and 2020. 

If left unchecked, the reflexive dynamics across asset classes could escalate into a full-blown crisis, particularly given the current vulnerabilities in the global economy and the U.S. private sector. Nuvama Institutional Equities cautioned that credit event risks have been a consistent feature in nearly all past financial crises.

The domestic brokerage said the market could be entering a capitulation phase i.e. broad-based selloff with cyclical sectors such as metals, industrials, renewable energy most vulnerable, the brokerage said.  

"Markets bottom not when easing starts, but rather when it is mature (QE) and valuations cheap," it said.

During a crisis, equities tend to undershoot relative to bonds. It occurred during global financial crisis of 2008, the European debt crisis and Covid. Today, on this metric, despite the correction, equities are 1SD expensive – suggesting stock market are still some time away from the consolidation phase, Nuvama said.

Key lessons from 2008  Nuvama pointed out the stock market first sold off owing to liquidity scare. High valuations coupled with rising oil prices and RBI’s liquidity squeeze sapped sentiment in the first phase.

The second phase saw selloff owing to growth scare. In such a period,  Nifty corrected 45 per cent in three months in tandem with oil and yields fell. Cyclicals such as metals, realty, industrials clocked 50 per cent-plus correction. Fed rate cuts began but sell-off continued, it said.

"Markets bottomed only when policy response reached mature stage: Markets made a bottom in Nov-08 after a steep correction (60%, 10x 1Y forward PE) cheapening valuations and policy response reaching critical mass (Fed’s QE and fiscal packages). However, they were range-bound until March 2009," Nuvama said.

Lastly, EMs including India and China too imparted large stimulus along with the US, resulting in strong rebound.

While the crisis this time too is originating in the US, a few differences are there. First, unlike 2008 the policy response seems to be less coordinated both between the US and global peers (retaliatory tariffs imposed) and also between US treasury and Fed– which is focused on inflation rather than growth, thus risking a delayed response. 

"Domestically, we are entering the crisis with much weaker growth. However, strong corporate balance sheets this time are comforting," Nuvama said.