Can the stock market fall to June 2022 levels? A to-do list for smart investors

Market


The trigger was the high inflation rate of 8.3% for August 2022. Although the headline inflation rate in the US seems to have peaked out, the investors are still worried about inflation and its effects.

The core inflation i.e., the inflation without fuel and food prices, has remained stubbornly high. This is the number the US Fed uses to make decisions on increasing interest rates.

The fear is that high core inflation will not come down below the US Fed’s target of 2% for long time. Thus, the fed will keep raising interest rates.

In this situation, the markets will have no choice but to start factoring in a US recession because high interest rates will slow down economic activity.

In fact, the US is technically in a recession already with the GDP growth for the last two quarters coming in negative. The markets believe the US economy could now slow down significantly.

This will have a huge negative impact on the global economy. After all, it’s common knowledge in financial markets that when the US sneezes, the world catches a cold.

This time however, a US recession could be worse than currently expected. This is because, Europe, Japan, and China are all heading for recessions too.

Add to this, the economic disruption caused by war in Ukraine, global supply chain issues, Russia cutting of gas supplies to Europe during winter, and it’s no wonder the markets are spooked.

This brings us to the worry that’s in the minds of every Indian investor, even if they don’t want to talk about it…

Can the stock market crash again, like it did between February-June? And if so, will the benchmark indices fall back to June 2022 levels?

The short answer is, yes it could. If the dark clouds of a global recession take centre stage, then the markets will certainly crash.

But the long answer is more nuanced.

A global recission is still not a done deal. China may yet avoid a recession, even though it’s looking difficult at the moment. The same can be said of the US too.

The truth is that no one has definitive answers to the questions of a global recession just yet. When will it start? How long will it last? How severe will it be? Which sectors will be effected the most? What will be the aftermath?

No one can say for certain. But one thing is certain. Global stock markets won’t wait for the answer.

Investors will pull their money out if they fear the worst will come to pass. And that’s what they seem to be doing right now.

But things are a little different in the Indian stock market.

Today, the market opened gap down, as expected. But then the market staged a huge recovery. The Nifty closed at around the 18,000 mark.

This shows the bullishness of Indian investors. Ever since the covid crash in February-March 2020, retail investors have done much of the heavy lifting in the Indian stock market. Recently, FIIs have joined the party to an extent.

So why is there bullishness in the Indian market when the rest of the world is facing a recession?

Well, investors in the Indian market have good reasons to be bullish.

First, they know there won’t be a recession in India this year or the next year or any time in the foreseeable future.

Second, listed Indian firms have done well over the last few years to reduce operating costs, cut debt, and raise prices in anticipation of higher input costs.

This steps, along with falling commodity prices will ensure growth in both top line and bottom line this year and the next.

In a scenario of rising corporate earnings and bullish investor sentiment, it’s hard to believe the market could crash to June 2022 levels.

Also, investors think food inflation in India will come under control thanks to multiple reasons.

Good rainfall this monsoon will result in a good kharif harvest. A good rabi crop will also help to keep prices in check. Food is the biggest component of the CPI. The Indian government’s decision to curb rice and wheat exports has also brought relief to those worried about inflation.

Falling crude oil prices and falling metal prices will bring further relief. The fall in global commodity prices will also help corporate India’s profits.

India is an import dependent nation for not only crude oil but several metals too. Falling prices will help maintain the government’s nation’s current account deficit at a moderate level.

This should also help stabilise the fall in the rupee which has been falling recently. A stable rupee will put a lid on ‘imported inflation’.

The RBI’s rate hikes will help prevent runaway inflation on the demand side.

Thus, Indian investors are far more confident of investing in stocks than investors abroad.

But this does not mean there won’t be a crash.

Stock markets are inherently unpredictable. Market sentiment is a fickle creature. If investors come to believe that the Indian economy will be badly effected in the event of a global recession, the bullishness will quickly disappear.

And the market could crash to June 2022 levels.

But smart investor should be prepared for this situation.

To that end, here’s a to do list…

Track the market sentiment in not just the US but also in Europe.

Be hyper alert to any sign of a recession in China.

Pay attention to a negative surprise in corporate earnings when quarterly results are declared next month.

Keep a tab on geopolitical developments, if not daily then at least once a week. Those who were paying attention, could foresee the Russian attack on Ukraine months ahead.

Finally, watch for any deterioration in the fundamentals of the stocks in your own portfolio. Even if the market is doing great, you shouldn’t stay invested in poor quality stocks.

Keep some cash on hand. If there is a crash, use it to buy high-quality stocks.

This short to do list should hold you in good stead no matter what happens in the stock market for the rest of 2022.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.


This article is syndicated from Equitymaster.com

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