Economic cycle, Recession and Share Market

Economic cycle, Recession and Share Market

INTRODUCTION:

What is RECESSION?

            Recession is a segment of Economic cycle.

            Economic cycle is divided into 4 phases.

            1. Expansion

            2. Peak.

            3. Contraction .

            4. Trough

Economic cycle is different than

1. Financial cycle

2. Equity market cycle

3. Debt market cycle

4. Interest rate cycle

5. Inflation cycles

All cycles are different and run together.

Impact is depend upon how many cycles are coming together.

2008 – 09 was Depression year because Financial cycle and Economic cycle came together.

Financial cycle means CONFIDENCE IN FUTURE or HOPE of the investors on assets.

If investors are Over optimistic then they buy assets at very high value.

PE expansion in stock market and Housing price are bubbles.

Financial Cycles happens due to Irrational Exuberance of investors..

Economic cycles are depend upon PRODUCTION and CONSUMPTION of products and goods.

It’s also cyclical in nature.

At the Peak of Economy people spend a lot, then suddenly they get saturated and reduce spending, the demand is reduced.  Production and job are reduced. Spending is  thereby reduced.  It’s a vicious cycle.

Business profit is reduced.

EPS is reduced.

Share prices collapse.

Then,.Through phase starts.

Government intervene and start Expansionary Fiscal policy.

Government reduce tax. Government spend on schemes and subsidy. People get money in hand to spend.

RBI reduce interest rate, people get loan and start spending.

Thereafter,  Economy start improving…

LESSONS LEARNT:

How to identify recession?

1. Go to www.nseindia.com

            Download data of Nifty PE ratio.

            Calculate Earning by dividing Nifty by PE.

            Plot the graph of Earnings.

            It will show where is our economy phase .

2. Cyclical stocks ( Auto and Commodity ) get hammered when contraction phase starts.

3. Market start correcting.

4. Lata Venkatesh and Soniya ask about Recession to Each Pundit.

5. Political drama of economic conditions starts.

For investing during recession:

            Active investors should invest in Defensive stocks at the peak of economics cycles.

            E.g. FMCG, and IT,

            Auto, Commodity and Banks may be beaten in recession

There is ALWAYS bull market somewhere in the world

            Investors need to stop blaming government for recession, and start finding Opportunities.             You can find at least 20-30 stocks at 52 weeks high when nifty is going down…