In the wake of Fitch Ratings’ decision to downgrade the US sovereign credit grade from AAA to AA+, the impact was felt on Dalal Street as well, with the Sensex plummeting over 1,000 points in intra-day trading, slipping below the 66,000 mark. The entire nation’s trader family was anxious with the reason of why is stock market down today? This downgrade resulted in investors losing Rs 3.48 lakh crore, as the market capitalization of all BSE-listed stocks fell to Rs 306.8 lakh crore, and the Sensex closed 676 points lower, with the Nifty managing to stay above its support at the 19,500-mark.

Memories of Stock Market Fall 2011

Fitch’s recent move evoked memories of the 2011 global stock market crash when S&P downgraded the US credit rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits. Despite the uncertainty, proponents of India’s strong domestic story and in-line Q1 earnings season argue that Fitch’s move won’t have a significant effect on the Indian markets.

Why Is Stock Market Down Today

“It is important to note that the downgrade doesn’t provide any new information that the market isn’t already aware of. Hence, the negative knee-jerk reaction will likely be short-lived. Global equity markets have been rising on the US economy’s soft landing narrative, and this downgrade won’t alter that,” said Dr. V K Vijayakumar of Geojit Financial Services.

While downgrading the world’s most powerful economy, Fitch pointed out that tax cuts, new spending initiatives, and multiple economic shocks have led to swollen budget deficits. “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch stated in a press release.

This fallout is now reverberating across world markets. On Dalal Street, all sectoral indices are trading in the red, with auto, banks, and metal stocks among the hardest hit. Tata Steel, Tata Motors, Hero Moto, Eicher Motors, and Coal India have suffered losses of up to 3.5%, while index heavyweights RIL and HDFC Bank have each lost over 1%. Fear is palpable on Dalal Street, as the volatility indicator India VIX has surged by 10%.

Other Factors – Why Was Stock Market Down Today?

1) Global markets: Indian markets are following weak overnight cues from Wall Street, with Nasdaq ending 0.43% lower and Dow Jones down by 0.33%. During the day, Asia stocks fell after Fitch Ratings downgraded the US sovereign rating. Japan’s Nikkei and China’s Hang Seng closed over 2% lower, as investors await the reaction of the US market later in the day.

2) FII hand: After pumping in about Rs 1.5 lakh crore on Dalal Street in FY24, foreign institutional investors have shown some signs of exhaustion in the last few days. Preliminary data shows FIIs sold Indian stocks worth Rs 93 crore in the last session.

3) Profit booking: July marked the fifth consecutive month in which Nifty ended on a positive note. The market has rallied over 13% in the last five months, giving impatient investors an opportunity to book some profits. “Signs of exhaustion are evident at higher market levels, following a strong rally from the lows in March,” said Santosh Meena, Head of Research at Swastika Investmart.

4) Valuation concerns: The one-way rally from the March lows has also put valuations under stress and left little room for an upside rally from here. Nifty is currently trading at 18.8x on a 12-month forward PE, which is slightly above its long-term average (16x), while it is trading slightly above the long-term average on a 12-month forward PB, according to Axis Securities.

5) Bond yields: US yields rose on Tuesday as investors expected an increase in government debt issuance and more signs of economic resilience, despite softening data. The 10-year yield stayed above 4%, despite some pullback after Fitch downgraded the government’s credit rating to AA+ from AAA, citing fiscal deterioration over the next three years. The Indian rupee fell 36 paise to close at 82.85 against the US dollar amid strength in the greenback and foreign fund outflows over the past few days.

6) Technical effect: After a long time, Nifty has closed below its 20-day SMA and also formed a long bearish candle on daily charts, which is largely negative. “We are of the view that 19450 would be the immediate support zone for the bulls. Above which, we could see a quick one-pullback rally till 19580-19600. On the flip side, fresh selling pressure is possible only after the dismissal of 19450, and below the same, the index could slip till 19400-19375,” said Shrikant Chouhan of Kotak Securities.

In conclusion, the reason for why was stock market down today can be attributed to a combination of factors that have created a state of uncertainty and caution among investors. The recent downgrade of the US sovereign credit grade by Fitch Ratings, coupled with weak global market cues, has led to a ripple effect on Dalal Street, impacting various sectors and heavyweight stocks. Additionally, profit booking after months of continuous rally and concerns over stretched valuations have further added to the pressure on the market.

While India’s strong domestic story and in-line Q1 earnings season may provide some support, it is essential for investors to closely monitor developments and exercise prudence during these volatile times. Factors such as foreign institutional investors’ behavior, bond yields, and technical indicators also play a crucial role in shaping market sentiment.

Way Ahead For Investors

As investors, it is crucial to maintain a long-term perspective and focus on well-researched investment strategies rather than getting swayed by short-term market fluctuations. Downturns can also present opportunities for the discerning investor to identify undervalued assets and make prudent investment decisions.

Remember that the stock market’s performance can be influenced by a wide range of economic, geopolitical, and global factors, and staying informed and updated is key to navigating these fluctuations successfully. While short-term turbulence may cause concern, it is essential to keep in mind that the stock market is inherently cyclical and has historically demonstrated resilience in the face of challenges.

Ultimately, exercising caution, diversifying portfolios, and seeking professional advice can help investors weather the storms and position themselves for long-term growth and prosperity in the dynamic world of finance.

As the markets continue to evolve, let us remain vigilant, informed, and adaptive, making well-informed decisions based on comprehensive analysis and a thorough understanding of market dynamics. Together, we can navigate the complexities of the stock market and embark on a path of financial stability and success.

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