Signs of a Market Reckoning Are Evident—But the Shock That Triggers It Remains Unpredictable
Something calamitous has occurred in the financial markets during the third decade of each of the past three centuries. The most infamous stock market bubble of the modern capitalist economy – the South Sea Bubble – occurred during the 1720s (18th century); the first emerging market boom and bust happened in the 1820s (19th century); and then, lastly, the Great Crash of 1929 that led to the Great Depression of the early 1930s (20th century). “Once is an accident, twice is a coincidence, but thrice is a pattern.” Given that we are midway through the third decade of the 21st century, and considering what happened in the previous three centuries, will the 21st century stay true to that ‘boom and bust’ pattern? This decade began with a black swan event – the Covid-19 pandemic; however, during that time, although financial markets crashed around the world, they quickly recovered. Additionally, because the contortions within the financial system or the economy didn’t cause the crash, what happened during those short months doesn’t fit a ‘boom and bust’ episode, which is more the product of widespread misbehaviour by economic participants.
Markets
It has been almost two years since the bull run in Indian stocks stalled. The Nifty50 benchmark index, which peaked on 23 September 2024 at 26,178.95, has since then, that is, for the past two years, remained volatile within the 22,000 – 26,000 range. An attempt to break out of this impasse, though it marginally succeeded more than a year later, in late December 2025, couldn’t be sustained. Nifty50 today trades 10 per cent below its peak from two years ago. Until August this year, Indian stocks were calmly recovering from their late-March 2026 lows, to which they fell as fear over the US-Iran war gripped investor sentiment. Then, for no immediately obvious reason, Indian stocks began to fall from 3 August 2026 onwards; now, five weeks later, they are down nearly 5 per cent. Though a 5 per cent fall doesn’t seem that serious, the way it looks on the stock chart – precipitous – rang warning bells in some distant corners of my mind, potent enough to warrant this writing, an attempt to make sense of what’s happening.
Immediate blame for the market struggles of recent weeks easily falls on inflation and bond yields. Inflation has been inching up steadily since March 2026 in India and major Western economies. Whether in reaction to that or not, long-term bond yields in the advanced economies of the US, UK, and Japan have risen by nearly 100 basis points since March 2026, perhaps anticipating higher interest rates to follow the rising inflation. Two major central banks have raised their policy interest rates so far this year: the European Central Bank (ECB), which raised rates twice this year by an aggregate of 50 basis points, and the Federal Reserve, which raised rates once by 25 basis points. Yet, with the inflation rate lately (August 2026) at 3.3 per cent in the European Union, higher than its prevailing policy interest rate of 2.65 per cent, it seems that, despite the two rate hikes, more hikes are warranted in the Euro Area to correct the deleterious economic condition of interest rates lagging the inflation rate. Although India and other major economies are free of such a situation for now, given the narrow margin by which interest rates lead inflation in these economies, it would be misguided to consider their situations innocuous.
In January 2023, I wrote a market outlook titled ‘The New Normal’, where I first posited that we are entering a new investment environment that sharply contrasts with the one that we had for the previous four decades. If those bygone decades were characterised by declining interest rates and low inflation, which favoured stocks and bond prices alike, that era had run its course and is due for a reversal; the new emergent environment will be characterised by high, rising interest rates and high inflation, not a favourable environment for stocks to prosper. In the nearly thirty-four market outlooks that followed, I argued for the same possibility with varied supporting evidence. What is transpiring now in markets – stagnant asset prices, rising yields, rising inflation – aligns with those arguments.
If the wind blows in the same direction as the boats are headed, more boats are likely to reach the destination, and that too, smoothly. In contrast, if the wind blows against them, very few boats are likely to reach the intended destination, and those that do reach it only after overcoming significant resistance. By this analogy, I try to impress upon you that we are moving from a ‘rising tide lifts most boats’ to a ‘receding tide strands most boats’ kind of market. Many stocks that prospered in the favourable environment of the past four decades will likely find it hard not only to prosper, but even to survive, in the emergent, challenging environment. Only a limited number of high-quality stocks with strong inherent resilience are likely to prosper in these harsher conditions. Yet, restrained by moderating valuations, an inevitable consequence of rising interest rates, the stock returns from even the successful cases are likely to be subdued. Though this restraining impact of rising interest rates on stock valuation depends on where valuations stand at the start, considering that stocks generally trade at elevated valuations today, for most stocks, what investors pay today for a unit of earnings, and what they may pay three or five years hence in the changed environment, will be less.
A notable development this year, which probably carries consequential value for market prospects, concerns gold prices. The bull run in gold prices, which began in February 2024 and lasted nearly two years, during which its market price rose by 152 per cent, ended in Jan-Feb 2026; gold prices today are down 19 per cent from their all-time highs. Because the end of the latest gold bull run and the start of the rise in global bond yields align closely, they warrant investigation for possible prescient significance. This overlap typically suggests either robust economic growth or aggressive monetary tightening. Which way it goes, we are unsure, but it will be intense, for sure. However, the choice needn’t be confined to either of the two; rather, a third option of coexistence exists.
Though we contemporaries are unaccustomed to it, robust economic growth and monetary tightening can co-exist. They have happened before, and such times have often brought pervading economic prosperity, provided that the tightening process remains acutely sensitive to the heartbeat of the economy. Perhaps such an eventuality would be the perfect cure for a period like now of extreme wealth and income inequality. However, a drawback, at least to some, is that such times won’t be exciting for the stock market and won’t be conducive to speculation. For stock returns, economic cycles of expansion and recession are less decisive than monetary cycles of tightening and loosening. In other words, stocks are likely to underperform during periods of monetary tightening irrespective of whether the economy is buoyant or depressed. Likewise, stocks are more likely to outperform even during depressed economic conditions if monetary policy is loosening.
The Accidental Boom
As widely believed, the ‘India Growth Story’ – the economic transformation of India into the world’s fastest-growing major economy – didn’t fuel the two-decade-long Indian stock market boom between 2003 and 2024, during which benchmark indices grew an average of 20 per cent annually. It was an emerging market boom triggered by declining and low interest rates and an excess of capital in Western advanced economies unleashed by their aggressive expansionary fiscal and monetary policies adopted to deal with a series of economic shocks, namely, starting with the bursting of the Internet bubble in 2000, the bursting of the housing bubble in 2007- 2009, and the Covid pandemic crisis in 2020. Investors seek alternative investment avenues when yields on their usual investments fall too low. In their domestic low-yield context, Western capital found India and a few other emerging markets attractive. The ‘India Growth Story’ causality link to the stock market boom was later formulated to rationalise these capital flows and further advance them.
However, interest rates in these advanced Western economies rose steeply and normalised during 2022– 2023 in response to a sharp bout of inflation. Those tightening measures largely anchored inflation, prompting central banks to reduce interest rates during 2024-2025 to support economies reeling under the strain of higher rates. Inflation now inching higher again seems to be thwarting those efforts. In the US, during 2022-2023, the Fed Funds rate (policy interest rate) rose steeply from 0.25% to 5.50%, and attempts to cut it were abandoned midway, at 3.75% in 2025, mainly because of the threat of higher inflation. The threat was real, and now the Fed has raised rates to 4.00% in September 2026; it seems the threat of high inflation and high, rising interest rates will stay with us for some time. In other words, the era of low rates and easy money is more likely behind us.
Over the past two decades, Indian stock prices have stagnated for nearly two years or more, like now, several times; during 2008-2013, 2015-2017, for example. Each time, however, the boom has resumed. The difference this time is that those earlier occasions were characterised by easy-money conditions, while we are now apparently in tightening-money conditions. A distress or panic has often closely accompanied the transition from easy money to more normal money conditions. Normalised money conditions reveal the excesses accumulated during the easy times, and their unravelling now being necessitated engenders a distress or panic. The steep interest rate hikes of 2022-2023 did incite a few less-intense, localised distress, but effective and prompt regulatory interventions contained them.
If those easy times are past, then what lies in store for the emerging market boom they engendered requires serious consideration. The first emerging market boom and bust occurred two centuries ago during 1822-25; the favoured object of speculation then was foreign loans of newly independent South American states and shares in South American mining companies. The optimistic narrative underpinning the boom and mania was that these South American states, now freed from the Spaniards, would achieve significant increases in income and wealth, made possible with great assistance from British capital, labour, and technology, which would greatly advance the productivity of South America’s abundant resources and massive mines, and Britain, with their investments and industrial superiority, would be the largest beneficiary. Beyond this enticing narrative, investors were attracted to South American state loans because they offered higher yields (nearly double those of British government bonds) and required only a small upfront payment, with the rest spread over a longer period. British banks, particularly country banks, recklessly discounted merchant notes and provided credit to speculators.
A significant portion of the capital raised was retained within Britain to pay dividends. No money ever came from South America to service these loans. The little money that went to South America was used to buy weapons to wage war on neighbours or to suppress internal dissent. As the retained reserves ran out, these bonds defaulted. Investors ignored calls for partly paid shares, and several mining firms applied for dissolution. Soon it became clear that the promises mining companies made in their prospectuses while raising capital were pure products of imagination, with no rational financial calculation behind them. As the panic unravelled in 1825, British stocks declined by 80 per cent; all the South American states defaulted on their foreign loans, except Brazil; hundreds of South American mining stocks disappeared; the leading mining stock, Rio Del Monte, saw its share price decline from £1,550 to £110; its issue price was £400.
Euphoria
We definitely live in excessive speculative times, as shown by the public’s enthusiasm for options trading that borders on hysteria, rapid rises in stock prices for companies related to artificial intelligence, and the massive capital expenditures on artificial intelligence by tech giants. A.I. and A.I.-related stocks are the most favoured objects of speculation today. The optimistic narrative driving this trend is the anticipated productivity gains for existing businesses from applying Artificial Intelligence tools. However, in all previous manias, when they eventually ended in panic or crisis, investors realised that most elements of the optimistic narrative that underlay the boom had no sound basis, were not rooted in ground reality, and were products of imagination. The most intriguing aspect, however, is that when the mania was in full force, investors were so credulous that they never gave a thought to put a pinch of doubt on the said narrative.
Many consider a healthy dose of speculation essential to the efficient functioning of a modern market-based economy. They call it the spirit of enterprise, or animal spirits, which, once lost, hinders economic progress. Nevertheless, no one has yet fully succeeded in estimating the extent, nature, and boundary of the intertidal zone that separates economic optimism and financial euphoria. This shortcoming is a major reason governments and regulators have consistently failed to curb overspeculation promptly. They feared public blame, anger, and humiliation if their actions, though well-intentioned, might inadvertently kill the spirit of enterprise. Also, since excessive speculation typically takes root in periods of general economic prosperity, governments and regulators avoid being blamed for ending the good times; they avoid being the mood spoiler.
Moreover, once the mania ends in distress or panic, regulatory actions to contain the situation always arrive belatedly; the reason has been a reluctance to extend a helping hand to the sinners – the speculators and the lenders who provided credit to the speculators – wanting to see them punished for their sole greedy pursuit of fast gains, without considering that the consequences of sinners’ actions befall the sinners and the innocents alike. Regulators fear that helping speculators and reckless lenders in times of distress will send the message that speculative ventures can hereafter be pursued with impunity, because a regulatory helping hand will always arrive when things go wrong.
Regulators and governments eventually budge when the situation worsens to the point of threatening the solvency of the banking system or societal stability; asset prices plunge, borrowers default, bankers fail, employers downsize, employees riot, and so on. The financial panic may subside with regulatory support measures. Yet, the economic distress may endure for a few months and, in leaving, take with it a few individual and institutional casualties. Committees and commissions are formed soon after to study the events that led to the panic and propose measures and guardrails to prevent such adverse events from happening again. Yet, time and again, new favoured objects of speculation emerge, and speculators find ingenious ways to circumvent the guardrails put in place against overspeculation.
Precursors
How do we estimate, to an approximately useful degree, the intertidal zone between prosperity and mania; the zone of crossover from confidence and optimism to excitement and overspeculation? For a keen observer, detachedly alert to the happenings of the times, there always are enough precursors alluding to excessive speculative spirit in ordinary economic transactions. During the mania, though conspicuous enough not to miss them, these precursors fail to register with those engulfed by the speculative fever.
It all begins with the emergence of a new favoured object of speculation. Speculative manias arise during those stages of economic cycles characterised by declining interest rates alongside an excess of capital. Investors, awash with capital and concerned about low yields from their usual avenues of investment, seek alternative assets with higher yields; in their desperation and credulity, they stumble on one specious alternative whose promises are so enticing to ignore that this new asset gradually becomes the new favoured object of speculation.
Excessive public participation in the speculative fervour is another precursor. Aroused by hearsay of early successes by others in speculating in these new themes or asset classes, naïve and new investors embrace it, wanting to emulate those successes for themselves. Once the mania ends in distress or panic, as it always does, and investors regain their rational senses, they learn, to their disappointment, that those early success stories were mostly rumours circulated by manipulators to advance their own puff-up and unload schemes. Prevalence of success rumours and the public’s fascination with them: if they ever come to your attention, instead of getting fascinated yourself, let them ring warning bells in thy mind.
Investors’ intentions behind their investment choices have predictive value. Initially, anticipated interest, profits, and dividends are the primary motivation for buying the favoured asset. However, during the most excited stage of speculative fervour, usually its final stage, investors, beguiled by rapidly rising asset prices, are motivated solely by the ability to sell at higher prices. The plausibility of the earnings required to justify such high prices never crosses investors’ minds when the mania is in full force.
A popular favoured object of speculation, excessive public fascination with it, prevalence of rumours about early speculative successes and the public’s desire to emulate them, speculative gains as primary motive for buying assets; these precursors we just discussed may indicate that we are in speculative times, yet these precursors are incapable of apprising us whether the mania has peaked, and a distress is around the corner.
Setting records for the number of issues and the amount raised, the recent three years – 2024, 2025, 2026 – have been exciting for the Indian IPO market. So far in September 2026, there were 30 IPO issues, a 30-year record in terms of count, and the amount raised during the month – ₹38,785 crores – is the third-highest monthly figure ever, after the ₹46,000 crores raised in October 2025 and ₹45,188 crores in October 2024. Considering the ₹2.5 lakh+ crores worth of issues in the pipeline, which include several mega IPOs, this excitement has no intention of abating any time soon, unless some unexpected shock punctures the (over)confidence underlying this IPO excitement bordering on frenzy.
A boom in new share issues seems a timely precursor to distress. A flurry of IPOs, mostly of poor quality, is an oft-repeated pattern during the last stages of a bull market. Public excitement, as shown by oversubscription and listing-price premiums, usually drowns out concerns about their poor quality. The people who arrange new issues and earn huge fees in the process – investment bankers – typically time these issues when the market valuation is the highest and investor euphoria is at its peak. However, the rush we see now signals bankers’ desperation to make the most of the good times, because they believe it won’t last long. In the case of the 1822-25 emerging market boom, nearly 100 new issues were floated during January 1825 alone; the mania collapsed about six to seven months later. An IPO boom has preceded most market distress or panic, though not all IPO booms have led to a market panic or crash. Only a slight correction followed the 2021 IPO boom.
Negative Shock
A negative shock unravels the mania; often a familiar one, perhaps expected too; however, what it unleashes is unexpected. At the mania’s peak, asset prices rise steeply, driven solely by new speculative capital, and a certain unexpected adverse development – a negative shock – somehow puts a leash on these capital flows; this is the point at which the mania begins to unravel and brings ruin to its most blind adherents.
Now suppose you foresee a certain negative shock forthcoming, say a decision to raise interest rates; assuming this to be the one adverse event destined to end the ongoing mania, you drastically reduce your exposure to risky assets to safeguard your portfolio against the market mayhem that will ensue once the mania ends and distress begins. However, we generally observe that although the shock frightens investors and triggers a short price correction, after a brief interval during which prices may remain highly volatile, the boom resumes, sometimes more vigorously. Investors who drastically reduced their risky-asset exposure are now condemned to watch the price rise again without their participation; later, reluctantly and cursingly, they embrace the asset again at a much higher price. Next time, when another negative shock arrives, they typically wait it out, given their previous experience.
Several negative shocks arrive at various times during a mania’s final stages, but which one holds the pin that pops and deflates the bubble can’t be predicted; it’s only known for sure once the bubble has burst. Losses mount during panics and crashes because investors believe what is happening is, as before, a short break and expect the boom to resume soon. But this time it was for real; the wolf has really come. Investors can only endure so much pain if their beliefs contradict what materialises, and once that limit is breached, letting go of the belief is the only option. In the final stages of a bear market, when prices fall sharply and sentiment is deeply despondent, investors let go of their belief that the boom will resume; they unload their investments and start counting their losses. But not for long; after a period of quiescence, as the pain and lessons of the past fade from memory, the same people, with renewed optimism, confidence, and credulity, are ready to jump on the next great transformative idea.
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