Aditya Goela, CFA

Aditya Goela, CFA

Co-Founder and Trainer at Goela School of Finance LLP | Chartered Financial Analyst® | Proprietary Trader | JoshTalk Speaker

Do you think that Recession = Market Crash?

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn

As on the publishing date of this article, investors are extremely confused about the current state of stock markets.

Nifty is sitting at an all-time high around 12300 levels with some companies like HDFC AMC which have moved up by 40% in the last 6 months. Markets are sitting at an all-time high but the economy is facing a huge slowdown. Our GDP growth is facing a severe slowdown since the 2008 financial crisis. Economist even saying it can be worse than 2008 :O

Many investors are confused with this phenomenon and ask questions like –

How markets are rising when there is big trouble in the economy?

At the Price to earnings ratio of 27, is the current level of nifty around 12300 sustainable?

How markets are rising when there is big trouble in the economy?

In this article, we will try to analyze these questions in a very logical way and see if the high levels of the market are really justified.

The Stock Market Looks Forward, the Economy Looks Backward

This is a very interesting aspect of the stock market that many people fail to understand.

Stock investors are continuously analyzing companies and consumer sentiments. They are always in the process of predicting possible future outcomes. Investors always analyze if present stock prices are justified in the future. Markets are very much updated with the real economy since they are continuously analyzing consumer sentiments.

In contrast, economists tend to look backward in the sense that they focus more on past data rather than future outcomes. They tend to look at the past 3-4 months of data and provide their opinion on the economy.

Example – They will declare if there is a recession or not after 3-4 months of the actual recession when they get their data whereas stocks will reflect the recession 4-5 months earlier than the real economy since market players keep a very close track on companies & consumers sentiments.

This is the reason why you will see a divergence between the real economy and the markets.

That’s why markets are said 4-5 months ahead of the real economy.

What does this mean for the Indian economy?

The high level of markets despite the economic slowdown shows us that investors are confident about the economic condition of India in the near future. Investors are expecting better economic conditions going forward.

Exceptions are high in increased production and consumer sentiments.

While our newspapers and TV channels are filled with negative news, the reality is that big players are still extremely bullish.

Market players are confident that the RBI and the government of India will take serious action & reforms to tackle the slowdown.

When the government announced a corporate tax cut in September 2019, the markets went up exponentially. Market players are confident that such actions aid the companies and revive the economy will continue.

At Price to earnings ratio of 27, is the current level of nifty around 12300 sustainable?

Although the PE of nifty is very high investors are still betting on stocks because they expect that the corporate tax cuts will pull up profits of companies. When profits of companies increase, the PE will also come down and stabilize to normal levels.

Conclusion

The next 5-6 months will be the ultimate test for the Indian economy and its markets.

Will the economy improve? will GDP growth rate improve or worsen? Is the market showing illogical projections? Will consumer sentiments improve? These are some of the questions we can ask ourselves.

No one can give 100% accurate answers to these questions as no one is sure of the future.

Till then, comment below your opinion.

Another interesting fact

We say our markets are at an all-time high but ironically only a handful of large caps have performed well. The broader mid caps & the small caps have severely underperformed the nifty & Sensex index. The nifty index has gone up by 12% in 2019 whereas the broader nifty midcaps & small caps have gone down by 12%. So interesting when we say that the markets have gone up we are only referring to the nifty and Sensex index but in reality, expect a handful of large-cap stocks almost all companies in our markets have severely underperformed.

To know why this happened, watch this Youtube Video – https://bit.ly/35EqM6Z

More to explorer

2020: What did it cost?

This year was a topsy-turvy roller coaster ride, where economy and stock markets had biblical gaps. Thousands of people lost their money

Join the Conversation

1 Comment

  1. Wow, this was a really intriguing article. I loved the part where it shows the different types of industries who benefit great from the economic cycle.

Leave a comment

Your email address will not be published. Required fields are marked *

Goela School of Finance LLP © 2021