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The fear of aggressive interest rate hike by the U.S and its impact on the global economy turning it into recession is the fear which makes markets tumble. Well, when fear takes over every inch of the logic then markets are bound to go for extreme wild toss. Don’t be surprised if Nifty Breaks below 15000 since that is very much within range now and Nifty coming down to rest and consolidate at 14500 levels are now very clear. The market fall will be aggravated more as those investors who have joined the market in the last 2 years particular the ones who joined the market by moving away from Debt products in search of returns in equities will start liquidating equities now.
In the last 2 years every month, we have around 10 lakhs new Demat account holders which comes to around 2.4cr new Demat accounts. These new investors will now stay away from more from the market even after doing some average buyout on their portfolios. The market is getting hammered by the valuation expectations which has been built by the analyst community. The quick return-driven investors who joined during the last 2 years now disappearing and this brings down the markets more. These investors are simply liquidating their portfolios and this is a global phenomenon now. The global market is experiencing a liquidation panic where everything is getting sold irrespective of an asset class.
These DIY investors are now more scared and a lack of historic experiences and knowledge leads to fear of flight. The senior citizens who came up to invest in equities when interest rates failed to beat inflation will now liquidate their investment and will get back to FD products where interest rates are increasing. The market always gets flooded with analysts and their expectations. The market is and will be getting hammered more as the high level of expectation of earnings and valuations takes a hit and comes down. For example, the rupee getting 78.11 led many analysts to think aggressive interest rate hikes so global recession and hence impact IT earnings as projects get reprised. Well, we have seen the rupee climbing from 45 to 65 from 2012 to 2015 and the journey of the Indian economy and its sectors. We did not have so much fear as we have now.
The biggest point to reflect is that this inflation management has been passed to the Central Banks from the government end. It’s well clear that the U.S needs war to make its economy survive. It may not be in a direct war but supplying weapons to Ukraine is an indirect gain for the U.S economy. Biden who is a strong friend of China is keen to uplift china’s tariffs imposed by Trump and hence we need to face a very high inflation rate so that Biden gets support from the public to open the doors for china. For china, this going to be a golden opportunity to makeover the lost relationship and wealth during the covid times. But unfortunately, China is now struggling with covid lockdowns and hence the plan of becoming a hero and catching the hand of its best friend Mr Biden has become a roadblock and so as for Mr Biden. The plans were perfect but the dice did not roll down as per expectation.
This inflation issue cannot be resolved by the central banks and this is a grey area which is being failed to be understood by the central banks. The government policies need to come ahead to fill up the gaps, and the reasons behind the inflation and take steps accordingly for the same.
This summer is already tuning up to be an expensive summer for the U.S with energy costs soaring to an all-time high. We have seen in 2015 how crude prices came down and dethroned the Middle East with supplies from Russia and the U.S. Today it’s very clear that the current inflation is only of energy cost and less of covid-related supply chain disruption. How this could be fixed by the central banks by hiking interest rates. Even if the inflation is created by supply chain disruption interest rate hikes will fix this long-term problem.
Post covid we are witnessing De –globalization, the extensive focus of countries on local supply chain and not towards being dependent on other countries for supplies. We have become focused on local sources, local manufacturing, and cheap at-home production and this is the beginning of inflation. The current crisis has also led to the creation of more aggressive inflation in the coming days which the central banks cannot control merely just by increasing interest rates. Household budgets of emerging economies and those just above the middle class segment are getting hammered. It’s high time that government interventions need to come into place replacing the central bank's tools. You cannot pass every economic decision into the hands of the central banks and the political system is just a puppet. In that case next time political candidates will erupt from Central Banks and not from the old political era.
The S&P 500’s top companies by market valuation shed more than $1 trillion in market cap in the past four days. S&P 500 sheds $9.3 trillion but this is less than the $9.8 trillion it shed in the aftermath of widespread COVID-19 lockdowns in 2020, but already was $1.2 trillion more than was lost during the Global Financial Crisis from 2007 to early 2009.
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