What do we learn from the stock market movement?
In the last few days, markets have been nervous. A lot to do with inflation and central banks increasing the interest rates. When the interest rates increase, the impact is negative on the overall growth of the economy.
Interestingly, it’s not the first time and I am sure it won’t be the last time either. Most of the central bank’s work is to tackle this problem.
Let’s look at the last decade and reflect on what has happened in the past and how did we fare in the journey.
The 2008 global financial crisis had a minimal impact on India due to its conservative policies. Our economy continued to do well even during 2008 and 2009. We received the highest ever inflows by FIIs to the tune of $29 billion in 2010.
A lot of the previous year’s euphoria was built into the market price, and we saw a correction of 25% in 2011.
Nothing unusual, the stock market bounced back by 28%. Another $25 billion we received from FIIs.
A very messy year for India. We were facing high inflation along with a high fiscal deficit. We must acknowledge our reliance on Oil, whenever oil price increases, so do inflation.
The market wanted clarity on policies and growth. The election in 2014 provided that hope. Along with that oil prices and other commodities collapsed. This reduced inflationary pressure in the economy.
When the commodity prices collapse, the world does not feature growth, meaning a tepid economic growth leading to a drop in corporate profitability. So, the stock market was range bound.
The market gave a window of 6 weeks to invest post demonetisation but recovered very quickly.
A much-awaited GST was implemented. Markets scaled up especially smaller firms zoomed past their fair value.
SEBI classification of mutual funds category along with expensive small and mid-cap companies saw a massive correction. Large caps continued to soar.
The debate over GDP numbers started, and a lot of pain was hidden due to a few companies doing well within the nifty 50 index.
March 2020 witnessed a heath crisis but had an unusual fear impact on the markets. All the commodity prices collapsed, central banks reduced to the lowest interest rates ever, a lot of developed countries distributed money for free, etc. Markets find comfort whenever the policies help increase corporate profitability. The market rebounded in the second half.
The news of the vaccine gave another push to the markets given the interest rates were still held low. We witnessed oil prices gradually inching up echoing the growth momentum.
Developed countries that distributed free money have so far seen the worst ever rise in inflation. The market was anyways sitting sideways since October 2021, waiting for such information to come in. The situation was accentuated due to Russia and Ukraine as well.
Anyone who is in the markets for the last decade or more will accept that the last two were aberrations. However, equity investors have made money over five-year plus investment period.
Equity investing is long-term and allocating for 2-3 years is a bad idea. Secondly, indices mask a lot of pain that individual investors might be facing if someone invested in a specific stock.
“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffet
History indicates that the stock market opportunities emerge only when the fear prevails. And when there is euphoria, it is time to fold your hand.
Mid 2021, 21-year-olds were offering me stock advice. I was concerned because when everyone around is talking about the stock market, clearly the bubble is built up. A lot of cyclical and low return companies without any cash flows were touching new highs. The recent correction is a problem for these low-quality companies. Similarly, the recent correction is an opportunity for high-quality companies.
I also believe that the recent western narrative is lopsided. India’s only concern at this point is the oil price. The western world will face more problems because of free money distribution.
Investing is simple but not easy.