Busting Popular Macroeconomic Myths

Are rising rates bad for the market and is high inflation bad for quality stocks?

- Saurabh Mukherjea

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets. Peter Lynch

In March 2020, with the COVID-19 induced panic in full cry, we had advised: “Four times in the last 40 years, a US recession, alongside falling US bond yields and falling oil prices, has been followed by a strong economic recovery in India. In fact, India has NEVER witnessed an economic recovery without a US recession preceding it! Now, all three conditions for an Indian economic recovery - a US recession, smashed crude prices and falling US government bond yields are - in place. Our portfolios - CCP and LCP are ideally designed to capitalise on such an economic recovery.” (See https://bit.ly/3Ii5Nu6)

Now, as pseudo-economics once again takes hold as we emerge from the pandemic, we once again take up our pen to bust popular macroeconomic myths such as when the Federal Reserve hikes interest rates later this year, the world will come to an end.

As the red chevrons in chart 'The trinity of US growth...' show, each grey bar (which denotes US recessions) is followed by a green bar (which denotes accelerating GDP growth in India). Typically, it takes anywhere between three to 12 months after the recessionary period in the US for the growth phase to kick-start in India, which means that within a year of the recessionary phase in the US, India's GDP growth begins to accelerate. Sustained periods of strong economic growth in India after a recession in the US have been observed in 1993–97, 2002–2008, 2009–11, and most recently the economic growth phase that began in 2021 after the COVID-induced slump.

Myth #1: Rising interest rates are bad for stock market