• A stock market decline happens when stock prices fall and continue to do so for prolonged durations.

• Market downturns may be caused by various factors like inflation, changes in monetary policies, rising interest rates, or changes in the global markets.

• Structural declines occur due to changes in the fundamental structures underpinning the market, while cyclical declines are a product of the usual business cycle.

• Historical data suggests that markets always tend to rebound and recover after periods of decline.

You must have heard about market declines or crashes, which might deter you from entering the stock market. However, it is important you understand what market decline is and why it happens.

A stock market decline occurs when there is a sustained period of downward trending stock prices. In other words, a declining market is when stock prices decline and continue to do so for a prolonged duration. During a market decline, prices of securities can fall below 20% or more.

In this article, we discuss what is market decline, the factors that cause market declines, and the common types of declines in finance.

Downturns in the stock market may be caused by a number of factors. Monetary tightening, rising interest rates, inflation, revisions in tax laws, and changes in the valuation of the Indian Rupee can all contribute to stock market declines. For instance, if the government increases the interest rates in the economy to curb rising inflationary pressures, the cost of borrowing instantly rises. This means borrowing funds for expansion, growth, and development becomes costlier for companies, resulting in reduced business activities. High rates also affect stock prices negatively, reducing investments and resulting in declines.

Similarly, high interest rates also curb consumer spending, with more consumers willing to save and earn better interest earnings than spend. Lower spending means lower revenue and profits for companies.

However, market declines may also be caused due to global economic trends. For instance, news of the Fed hiking US interest rates can impact Indian markets. Hiked interest rates in the US causes foreign investors to pull out from the Indian market, resulting in intense volatility in the domestic market. Other than that, stock market declines are also caused by factors like global conflict, political regime changes, and natural disasters.
 

Also read: Forward contract

Now that you know what market decline is, it’s time to explain the concept of structural decline in finance. Structural decline refers to the downward shift in productivity or prices caused by a change in the fundamentals underpinning the market. Structural declines are essentially long-term, fundamental weakening of the industry, sector, or market. Unlike temporary cyclical downturns, which are tied to economic cycles, structural declines are caused by deep-rooted factors like technological advancements, regulatory changes, shifting customer preferences, or changes in the price of essential inputs. In a nutshell, when we say a market is experiencing structural decline, it means that the market is contracting over a sustained period due to long-term, fundamental changes in its environment rather than short-term, cyclical factors.
 

Also read: SGX Nifty

A cyclical decline is the opposite of a structural decline. Every business, industry, and market goes through business cycles where there are periods of expansion, peak, contraction, and troughs. A cyclical decline is a temporary downturn in a market that naturally follows after a period of expansion. In other words, cyclical declines are declines resulting from the usual fluctuations in the business cycle. Cyclical declines can be caused by factors like falling returns, rising labour costs, increasing costs of borrowing, and decreased consumption.
 

However, since cyclical declines are linked to regular business cycles, they are followed by a recovery period where the market rebounds. Most investors adjust their share trading strategies anticipating cyclical declines and eventual market recoveries.
 

Also read: What is a Demat account

So, what is market decline? Stock market declines occur due to various reasons. Declines may be structural, where a fall in the prices of securities is due to fundamental factors like technological changes, or they may be cyclical, where downturns are simply part of regular business cycles. Regardless of the type, market declines are common. However, it is important to note that declines are not permanent. Historical data on market declines shows that markets experience periods of decline but also recover and rebound. As an investor, you must understand that market downturns are a part-and-parcel of investing and refrain from panic selling.