📈 Reasons Behind Sensex's Sudden Rally
This Tuesday was Sensex's second best day this year. Wondering why the index saw such massive gains suddenly? ReadOn!
Sensex down by 861.25 points and Nifty 50 down by 246.
That’s what the market looked like on the first day of the week, turning everyone’s Monday blues into Monday reds.
But Tuesday was a whole different game
Waqt badal gaye, jazbaat badal gaye but in a good way.
Sensex climbed 1,564.6 points, while the Nifty 50 gained 2.6%.
In fact, this was Sensex’s second-highest single-day gain this year!
So, what brought this sudden and massive change?
🔍 Decoding The Stock Market’s Rise
A major reason behind the current rise in the stock market is the Jackson Hole conference.
The Jackson Hole Symposium is an annual meeting where all of the world’s central bankers, policy makers and economists (basically all the people who decide what's going to happen to your money) meet to discuss monetary policy. This year it took place between August 25-27.
So, this conference basically highlights and informs people about what steps central banks are planning to take this year and how it is going to impact them.
And this year’s conference was super important as the topic to be discussed was how to tackle the insane inflation that we all are witnessing.
The answer was not something people had expected: The US’ central bank along with several others are going to keep increasing interest rates, even if this brings in a recession.
That’s because even though inflation has kind of calmed down in India (down to 6.7%), it is still raging wildly in other countries.
Especially the US (8.5% inflation rate).
And these countries want to bring down the real interest rates to zero. Huh?
Real interest rate is the actual rate of interest you get on your investments or savings after accounting for inflation.
With an inflation rate as high as 8.5% it is difficult to get inflation-beating returns.
So, the Federal Reserve and other central banks are willing to risk a recession to beat inflation, so that people’s savings and earnings don’t completely lose their value.
Okay, ReadOn, we get it. But how has this impacted our stock market?
Here’s how:
Bank stocks were one of the major gainers in Tuesday’s rally. HDFC, SBI, Axis Bank, ICICI Bank, and several others saw their share prices rising. The Jackson Hole conference could be behind this. You see, investors are probably expecting that the RBI will also raise interest rates now. And high interest rates mean that banks and financial institutions will see higher earnings.
The conference has also fuelled fears of a recession in the US. So, a lot of foreign institutional investors and foreign portfolio investors, who had been pulling out of the Indian market for the past nine months, are now returning to find better investment opportunities. Just till August 19, FIIs bought shares worth $4.6 billion, up from $600 million in July. This has also helped stocks gain.
Recession fears have also brought down oil prices, because if there is a recession and the economic growth slows down, the demand for oil will fall. Thanks to these fears oil fell by over $5 to $99.31/barrel. Now, when oil prices fall, stocks usually rise. Because a decline in oil prices could help most companies increase their profits. So, this also contributed to the rise of the stock market.
The same reason can also be applied to the dollar's fall. The currency came down from its 20-year high on Tuesday. And when the dollar falls, people are less keen to invest in US markets. In comparison, the rupee rose, and the chances of it rising higher seem stronger now, so more people invested in the Indian markets, giving us a boost.
So far, we seem to be gaining from news of a US recession. But if a recession actually hits the country, we won't be spared either. The impact will be felt first by our IT firms, who have a lot of US clients. Then by the startup ecosystem, who will see the funding winter get colder. Just the news of a US recession could also make people more cautious about how they are spending money, which could reduce demand in the Indian markets as well, triggering a recession here.
So, we need to be cautiously optimistic.
Another interesting fact: Indian equities currently have been performing much better than our emerging market rivals.
While the MSCI India Index (which provides stock market performance analytics) has gained 50%, the MSCI Emerging Markets (EM) Index has fallen by 22%.
Price to Earnings ratio of MSCI India: 24.5
Price to Earnings Ratio of MSCI EM: 11.2
But this isn't good news. You see, data since 1995 shows that any time Indian equities are trading at a 100% valuation premium, meaning they are twice as expensive as other emerging markets, markets tend to correct (which means fall) soon after.
This along with the threat of recession means, we could soon be in for a massive downturn in the stock market.
Do you think the markets are going to correct soon or are we in another bullish phase?
⚡In a line: The stock market is rallying due to fears of a US recession but this rally may not last long.
💡Quick question: Are you bearish or bullish on Indian equities?
Share this with your friends via WhatsApp or Twitter and help them declutter news from noise! See you tomorrow :)
You can also listen to our stories. Catch it on Spotify, Apple Podcast, Amazon Music, Google Podcasts, Gaana or Jio Saavn.
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇