History May Not Repeat, But it may rhyme
- Research Desk
Dear Investors,
Greetings from Ace Lansdowne!
With such volatility in the market, doesn't it look like a year has passed? However, it has been just 2nd month of the year.
Geo-political risk due to conflict between Russia & Ukraine has proven to be an added cloud in the worrisome atmosphere of inflation, rising crude price, and rate hikes expectation (assuming covid is behind us).
In 2022 (peak to trough) - S&P 500 witnessed a correction of ~12% so far and Nifty50 has also experienced correction of ~13%.
History may not repeat, but it may rhyme
So, let's look at history when few ofsuch events have already happened-
Fed rate hike cycle -
If one looks in to the trends of Fed rate hikes cycle, you will be surprised to know that historically, markets have actually run up after the first-rate hike. In fact, stocks have risen at an average annualized rate of 9% during the 12 Fed rate hike cycles since the 1950s and delivered positive returns in 11 of those instances. Similarly, India has also seen positive returnsin 5 out of 6 Fed hikes.
| Feb rate hike cycle | Index returns from start to end of cycle | |||
|---|---|---|---|---|
| Start of the cycle | End of cycle | S&P 500 | Nasdaq | Sensex |
| Jan-77 | Jul-81 | 31% | 127% | - |
| Feb-83 | Aug-84 | 31% | 14% | 14% |
| Mar-88 | Mar-89 | 37% | 30% | 79% |
| Dec-93 | Apr-95 | 10% | 8% | -6% |
| Jan-99 | Jun-00 | 20% | 66% | 43% |
| Jun-04 | Jul-06 | 13% | 3% | 124% |
| Nov-15 | Jan-19 | 39% | 52% | 39% |
*Source - various media articles
Geo-political issue
Further, history also suggests that war effect while had short-term impact on the Dow Jones Industrial Average (DJIA) indices however over the 3 months term, the DJIA gave positive return.
| Event | Reaction dates | No. of days it hit lows | Change % | % Change | ||
|---|---|---|---|---|---|---|
| 3 months | 6 months | 1 Year | ||||
| Korean war | Jun 23,1950 - Jul 13, 1950 | 20 | -12 | 15 | 19 | 26 |
| Sputnick | Oct 3, 1957 - Oct 27, 1967 | 19 | -10 | 7 | 7 | 29 |
| US bombs Cambodia | Apr 29, 1970 - May 26, 1970 | 27 | -14 | 20 | 21 | 44 |
| Arab oil embargo | Oct 18, 1973 - Dec 5, 1973 | 49 | -18 | 10 | 7 | -26 |
| Hunt Silver crash | Feb 13, 1980 - Mar 27, 1980 | 45 | -16 | 16 | 26 | 31 |
| US bombs Libya | Apr 15, 1986 - Apr 21, 1986 | 6 | 3 | -4 | -1 | 26 |
| Iraq invades Kuwait | Feb 8, 1990 - Aug 23, 1990 | 21 | -13 | 2 | 16 | 22 |
| Gulf war ultimatum | Dec 24, 1990 - Jan 16, 1991 | 23 | -4 | 20 | 19 | 25 |
| World Trade Centre (car bombing) | Apr 18, 1995 - Apr 20, 1995 | 2 | 0 | 5 | 9 | 14 |
| September 11 Attacks | Sep 11, 2001 - Sep 21, 2001 | 5 | -16 | 24 | 30 | -1 |
| Fears about China's economy | Jun 28, 2015 - Aug 24, 2015 | 20 | -15 | 16 | 7 | 20 |
*Source - various media articles
Looking at such trends, it is obvious that long term prospect looks positive but the problem lies in short term. One common & prominent thing in all such event is uncertainty. As far as Indian market is concerned uncertainty is on account of –
a) Brent crude has already crossed 3-digit mark & currently at levels which were rarely reached in past half century. Still there is no hike in petrol / diesel price yet. So, impact ofsame is yet to be seen.
b) Rural economy was yet to recover post covid and since there was no major allocation in budget 2022 towards it, the same may get delayed further. Now with higher inflation, uncertainty level has further increase in ruralrecovery. High inflation can also be witnessed through price hike taken by FMCG companiesin Feb'22
c) Such massive quantitative easing has never been experienced before & hence the effects of withdrawal are unknown.
d) Yield is rising on expectation of rate hike and in such volatile equity environment, investors will prefer flightto safety.
e) Bigger issue (though temporary)- tension between Russia and West may unfoldmany other problems adding to overall uncertainty.
Looks like year 2022 is going to be more volatile for equities and the teaser of same is out already. This market scenario will separate men from the boys who recently entered the market considering it unidirectional.Because volatility is the feature of the market and not the bug so one has to be ready for the ride.