Don’t read too much into Budget day market moves

Are you worried that the Sensex dropped 3.6 per cent last week after the presentation of the Budget? There is no need to panic, though.

Historical data on the Sensex movement on the Budget day and thereafter show that investors’ immediate reaction is no indicator of the market movement for the rest of the year.

An analysis of Sensex movements since 2001 — on the B-day, a week following the event and till the end of the year — shows that the Budget day trend is shortlived, not even lasting a week. On half the occasions, a sell-off post Budget has been followed by a recovery within a week.

Equally, a gung ho reaction on B-day can fizzle out within a week.

The Sensex movement on the day of the Budget announcement or even in the week that follows also has little impact on the current structural trend in the market.

Since 2001 only on four occasions has the Sensex not rallied after the Budget. These are 2001, 2002, 2008 and 2011.

And in these years, the negative bias has tended to extend till the next Budget. The Sensex posted losses of 13, 8, 45 and 0.8 per cent from its Budgets in 2001, 2002, 2008 and 2011 to the next.

In all the other years since 2001 (the start year of this study), the stock market has been in a strong bull run and the benchmark index has closed with double-digit gains.

In many years some profit-taking happens in the market after the year-end and ahead of the next Budget. For instance, the Sensex, which was up 56.8 per cent in December 2007, gave up some of its gains to close 37.8 per cent higher ahead of the Budget in February 2008.

Similarly, in 2010, the Sensex had gained 24.8 per cent by the year-end, but was up just 7.7 per cent ahead of the next Budget in February 2011.