The ‘untold’ market story

Indices could mask performance in individual stocks and therefore do not entirely represent the correction in the stock market

As the headlines bemoaned just a couple of weeks ago, the Nifty 50 crashed almost 5% in a day. There were several falls thereafter. If you were among the astute investors who thought this was a great buying opportunity, you would have stopped likely when you read the headline screaming a Nifty recovery.

As it stands, the Nifty 50 is down roughly by 6.4% since its high in October 2021 (as of March 18). So, you may now think that the correction is either done, or that it hasn’t been deep enough to allow buying at cheap enough prices, going by the Nifty 50 returns. But did you know that the Nifty or the Sensex could mask performance in individual stocks and therefore does not entirely represent the correction in the stock market?

Wider correction

The full market capitalisation of the Nifty 50 is about 58% of the Nifty 500’s market capitalisation. The latter represents the whole market better than the 50-stock index. Therefore, though the Nifty 50 may be dominant, there’s plenty outside this 50-stock universe.

Remember that indices such as the Nifty or Sensex are market-cap weighted, which means rallying stocks receive more weight. Therefore, a few stocks can influence the index’s returns even as most other stocks perform differently.

Consider the stocks in the Nifty 500 basket. Close to 60% of them have seen prices decline much more than the Nifty 50 since the October 2021 peak. The average decline in the stocks is a good 18% — much higher than the Nifty index’s correction of 6.4%. In other words, a majority of stocks in the market corrected more than the Nifty. You may not have looked for stock opportunities if you had only followed the Nifty level.

The bulk of these, of course, is in small-cap stocks. This is natural, as this market segment usually bears the brunt of corrections but then, this segment also sees far bigger rallies. But even apart from small-caps, there is a good smattering of stocks in the mid-cap and large-cap segments that have seen steep falls.