Indian Stock markets in tune with other global markets have been correcting quite sharply over the last three months or so with the Nifty benchmark index corrected by more than 10% from its all time high made in Oct 2021. This is the first meaningful correction in the equity markets after a one way steep rise of almost 150% for the Nifty 50 benchmark index from its low made in Mar 2020. This ongoing correction has been very brutal and we have seen good quality stocks getting corrected by 30-40% from their recent highs. Correction in the markets was overdue and primarily attributed to the following factors:
- Omicron variant of Covid 19. The fear of major economies going into lockdown once again created panic in the markets, although nothing of that sort has actually happened worldwide.
- Expected increase in the interest rate by the US Federal Bank, tightening of liquidity in the market, and increase in US 10 years bond yield. As the CPI inflation in the USA reaches 7.5%, the highest in the last four decades, an increase in the interest rates is inevitable thus beginning the reversal of the low interest rate cycle. A lot of noise is being created that the stock markets would be undergoing major correction due to an increase in the interest rates. However, if we analyze the past data on this, the following points merit attention
- The S&P 500 (broader index of US stock markets) has given around 9% return on an average, in the 12 rate rising cycles since the 1950s. In these 12 rate rising cycles, the US benchmark index has risen in 11 of these rate rising cycles.
- The Fed hiked interest rates 17 times from the middle of 2004 to the middle of 2006. S&P 500 rose 46% during this period
- The Fed hiked interest rates 9 times from Dec 2015 to early 2020 (from 0.25% to 2.5%). The index rose nearly 50% in the first 2 years of this rate hiking cycle
- Hiking the interest rates by the Central Banks is a validation of strong economic growth and some of the steam needs to be taken out by squeezing the liquidity from the market by increasing the interest rates.
- Stock markets, the world over, tend to rally when the rates are hiked and tend to correct when Central Banks indicate that the interest rate hikes have stopped.
- The graphical representation of the performance of S&P 500 with the interest rates since 1980 is self explanatory
- Russia invading Ukraine? Military tensions between Russia and Ukraine are also causing quite a lot of volatility in the stock markets over the last few days. Though, if we listen to the media, chances that Russia would attack Ukraine are very high but, in my opinion, it’s quite unlikely to have a military conflict, and even if there is a war between both the countries, its effect on the stock markets is likely to be short-lived.
- There has been a widespread and brutal correction in the Indian stock markets in line with other global markets over the last three months or so. This correction seems to be a pullback in the overall strong bull market started in Apr 2020 and offers a good investment opportunity.
- All previous corrections look like a lost opportunity; ongoing correction is no different, although it feels this time it’s different
- The fall in the market is primarily attributed to the expected increase in the interest rates due to higher inflation by the Central Banks all over the world. The rise in inflation is a validation of strong growth and an increase in interest rates is unlikely to stall the ongoing bull run. A classic example is the 2003-07 bull run; despite the increase in interest rates in 2004, the markets kept on going higher for the next three years
- Market corrections are temporary; growth is permanent; Hold on to your investments with conviction until financial goal(s) is achieved. Switch yourself off from all market voices and avoid looking at your portfolio too often.
- It’s futile to try and catch the market bottom to start the investments, now is the time to start investing. Wiser people have said, when there is blood on the dalal street, go out and do your shopping.
- It’s important to invest in equities, preferably through mutual funds. There is no better asset class than equity.
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