The more things get volatile, the less volatile our approach to investing needs to be
01-Mar-2022 •Dhirendra Kumar
I have no hot takes on Ukraine or Russia or anything like that and I'm sure you'll thank me for that. Instead, I'll focus on the apparent impact of world events on our investment and savings activities and what, if anything, should we all do about that.
By now, it's reasonably clear that the movers of markets around the world seem to think that this is a passing cloud. The US markets have been falling for a few weeks now. In recent days, as some kind of a conflict looked more and more likely, the decline had sharpened. However, the day after the action began they turned upwards, with the S&P 500 index recording an increase of 1.5 per cent, which is quite substantial. Notably, the Ukraine situation had no role in the decline during January.
In India too, we have seen something similar. On February 24, 2022, when fighting had just begun in Ukraine, the markets fell by almost 5 per cent - the worst single day in a long time by a large margin. The very next day, just like most markets around the world, the mood lifted. Surely, as it happened with the Chinese virus, it would take a few weeks or at least days for the fog of war to clear and the way forward becomes visible. So why the enthusiasm?
Well, even though there may be some ups and downs, the reasons are not hard to find. I could yet be wrong but I think the super-punters of the world in Wall Street and elsewhere feel that the European crisis will stave off the liquidity squeeze that was said to become. Recall that the broad global decline in earlier weeks was caused by a general expectation of tightening money. As I'd written a couple of months back, inflation in the United States is at a 40-year high.
This is the inevitable result of the humongous amount of money that has been created by the US Federal Reserve in the past few years. In 2008, the United States money supply stood at USD 7.5 trillion. By 2019, it was more than double that. Now, it has increased to USD 21 trillion. Late in 2020, someone calculated that more than 20 per cent of all dollars that existed had been created in the previous ten months. I'm sure the figure is higher now.
Now, it seems that Wall Street has decided that with yet another crisis looming, the flood of money will not cease, at least for the time being. This is why markets have turned up again. There's no way of predicting this. The Biden regime is extremely worried about inflation. Despite talk of massive sanctions against Russia, it is significant that the US has decided to let Russia's petroleum and gas operations operate unhindered because of inflation worries.
As an investor, what should be your course of action? I would say that keep reading the news but don't let it affect your investment outlook. You and I have no way of really looking into the future and figuring out what happens to global liquidity or the conflict or Vladimir Putin's or Joe Biden's state of mind. However, the important thing to remember is that we don't need to know any of this unless we are punters who are buying and selling stocks within a few days' horizons.
However, most of those who read my columns here may be real investors. With all these momentous events playing out, there's little doubt that volatility and perhaps substantial declines will be seen across stocks. However, the fact remains that the Indian markets are much more resilient to such shocks than earlier. Large domestic inflows, especially from equity SIPs and the EPFO, provide a cushion that was missing earlier. Some hiccups might be coming, but investors would do well to stay focussed on the quality of their investments and not shy away from taking advantage of low equity prices.
At the end of the day, if you are focussed on quality stocks, the weeks and months to come are going to be an opportunity to buy at a great value, more than anything else.