As per the technical definition of the recession, the US economy has entered into the recession post registering negative GDP growth for 2 quarters consistently. The US Federal Reserve also took a rational step of taking interest rate hikes. Ideally, this situation should be a worrisome condition for the market, but oppositely the market is on an upward rally. So, let’s discuss what are the reasons behind the upward rally in the stock market despite US recession fears.
Impact of the US Recession on the Global Economy?
- The US Economy is the largest consumer economy with high imports and hence there are high dependencies of Global Companies upon the US. And if there is a condition of Recession in the US or the case of slow growth, then there will also be some cascading impact of this upon the global economy.
- The US Federal Reserve took a rate hike of 0.75% in its last meeting in the last week of July 2022. The rising interest rate case leads to rising costs for businesses which impact corporate growth. The rising interest rate also leads to the pulling out of money by Foreign Portfolio Investors (FPIs) from the emerging markets and investing in US Bonds.
Why Stock Market is going up despite the recession in the US?
- The stock market is forward-looking. The stock market has already discounted the possibility and the impact of recession (as per the technical definition) in the US.
- Since there is a higher inflationary environment across the globe and particularly in the US, it was expected that the Fed Reserve will take an aggressive call on rate hikes to cope with inflation. And hence once again, the rising of interest rates in the July meeting of the Fed Reserve was already expected by the market and therefore the stock market did not react negatively when the actual rate hike happened.
- Currently the market is on the path of “Worst is Over” as the commodity prices are cooling off, easing off of restriction on Russia leading to softening in commodity supply from Russia & Ukraine, easing up of Covid restriction in China leading to smoothening of the supply chain.
- Further to control high inflationary pressure, the US Fed Reserve might take another round of interest rate hikes of around 0.75% which has already been expected by the stock market.
- The Indian Stock Market specifically is on the belief that the slowing pace of interest rate hike of US Fed reserve might also cool down the FIIs outflows and stabilization of the currency depreciation in the coming time.
What Should Investors Do?
The US, the Economy believed to be in recession technically, but if such happens fundamentally, then the Indian IT, Pharma, and other export-oriented industry might be impacted. Still, these issues will be a short-term concern from the current viewpoint. Investors from a long-term perspective should continue to follow a staggered manner of investing approach and asset allocation methodology to attain financial freedom.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.