Had the 2003-2007 Bull Market & 2008-2009 Bear Market not been so Severe?

Dear Readers, I am playing God in this post. 🙂
Everyone keeps talking about the severity of Indian bull market of 2003-2007 and the bear market of 2008-2009.

Now almost nobody actually expects Indian markets to rise like it did between 2003 and 2007. I read an interview online, where a market commentator said that “2003-07 was really a macro-bull market where… you had four years of 40% compounded earnings growth without inflation and interest rates falling.” That is almost (un)repeatable. Also, nobody expects our markets to fall like it did between 2008 and 2009.

2003 2007 Bull Market 2008 2009 Bear Market

Interestingly, most people feel that these two phases were once in a lifetime opportunities for investors. And I personally don’t doubt it. Its rare to have a bull market that rose almost 40% a year for more than 4 years. And its equally tough to have a bear market which falls by more than 50% in just about 15 months.
Now I am not trying to predict whether similar bull or bear market moves will ever happen again or not. What I am trying to do is to answer this simple question:
What would have happened if the Bull and Bear markets between 2003 and 2009, were not as ferocious / severe / eye-popping as they actually were?
Now there might be complex statistical approaches to provide a solution to the above question. But I am not a world-class statistician. And honestly, I did a Google search to find whether similar analysis were done in past or not. And as expected, nobody wasted his or her time on this 😉
But I decided to answer my own question. And for that, I did the following:

  • Took Sensex data starting from January 2000.
  • Assumed (approximated) the Bull market started on 1st January 2003.
  • Assumed the Bull market ended on 31st December 2007.
  • Assumed the Bear market started on 1st January 2008.
  • Assumed the Bear market ended on 9th March 2009.
  • During the bull market from 2003 to 2007, I relaxed the index movements by 10%.i.e. if index moved by 100 points, only 90 points were considered.
  • So if Sensex was at 1000 on 1st Jan 2003, and it moved +10 points on 2ndJan to close at 1010, then at the 10% relaxed level, Sensex would have instead closed at 1009 (= 1000 + 90% of 10 points).
  • From there on, a new alternate Sensex would come into existence and which will only consider 90% of the actual movement for index level calculations.
  • Same thing was repeated during the bear market of 2008-2009.

So effectively, what I did was to reduce the impact of Bull and Bear markets by 10%. Resultantly, all daily movements between 1st Jan 2003 and 9thMarch 2009 were 10% less severe.

Then this entire exercise was repeated using 20% relaxation!
Here is the result of this exercise:
Indian Bull And Bear Markets

As you can see above, the graphs for both 10% and 20% Relaxed-Sensex levels look strikingly similar to the graph of actual Sensex. But that is not strange considering that I have just reduced the intensity of daily movements by 10% in one case (Red) and 20% in other (Green). I have not made any other modifications.
Now comes the interesting part.
10% Less severe Bull and Bear market
The Sensex was at 3377 on 31st December 2002. Now when the bull market ended on 31stDecember 2007 (assumption), the index had reached a high of 20,287. If we relax the index movements by 10% (as described above), it would have reached 17,155.
2003 2007 Bull Market India
Lets see what happened in the bear market of 2008-2009:
Now index crashed from 20,287 to 8160 in just a matter of 15 months. Had the fall not been so severe (and also assuming the rise had been less severe between 2003 and 2007), the index would have gone down to 7,637. It is lower than actual level, but in percentage terms, the fall is less severe considering the peak was 17,155 (and not 20,287).
Lets move on and see what happens when index movements were further relaxed by say, 20%.
20% Less severe Bull and Bear market
Sensex in this case would only have risen upto 14,469 in 2007 and fallen to a low of 7112 by March 2009.
2003 2007 Bull Market India 20%  2008 2009 Bear Market India 20%
When the Bull + Bear markets (2003 – 2009) are looked at in totality (without, as well as with 10% and 20% relaxations), following results are obtained:
Actual Project Sensex India
As you can see, even after reducing the daily movements by 20%, index still managed to do a pretty good job between 2003 and 2009. And that is inspite of having witnessed one of the worst bear markets ever. This points at the (almost) unbelievable rise of Indian markets between 2003 and 2007.
Now I am not trying to come up with any insights here. This post is all about exploring a ‘WHAT-IF’ scenario. A scenario where the bull and the bear markets, were not as severe as they actually were.
Why I did this?
5-word answer will be sufficient here:
Just Out Of My Curiosity. 🙂
Caution: No part of this post should be considered as an analysis on which, you should base your future investment decisions. My curiosity can result in your losses. And you (or I) don’t want it. 😉

Note – For those who are interested in knowing about the Sensex levels, had the so-called Sensex relaxation approach followed till recent times, the Sensex would have been at 24,596 and 22,905 at 10% and 20% relaxation levels on 31st August 2015. Actual Sensex was at 26,283. But please note that relaxation was only applicable between 2003 and 2009. After that normal daily index movement (in %) was applied to arrive at these fictitious Sensex levels.

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