Even when the markets were in the middle of a severe correction, investors went on to average out their investments in the hope of recouping the losses. On the other hand, smart money managers were still seen selling the stocks they had accumulated.
There is a strong correlation between the performance of the market and what happens to the economy. True that the last bull run during 2003-08 was partly led by liquidity, it also had a lot to do with strong improvement in fundamentals of the Indian economy. During 2003, the Indian economy grew by 3.8 %.
However, in subsequent years it grew on an average more than 8.5%. This was led by low interest rates, credit growth, favourable government policies to open up several sectors and huge investments in the economy, particularly in infrastructure, which improved corporate earnings and profitability.
Just as good times don't last forever, the memories of last year's slowdown, considered to be the most devastating for the markets, are still fresh in our minds. Within a short span of time, the Sensex corrected almost 65% and most of the mid-cap and small-cap companies were trading almost 70% to 90% lower than their highs in early 2008.
Drawing a judgment about such bad times is not at all something that only smart money mangers know, even a lay investor can make better investment decisions with the help of few basic parameters and homework. A small homework and tracking of key economic indicators can provide a lot of insights about such situations and also the ability to act on them in time.
Inflation
Inflation is probably the single largest starting point of most economic problems. This is also widely used to understand the measures that governments or central banks might take and their impact on the economy. Inflation beyond a certain level is always considered to be negative as it erodes the value of money and could become a cause of concern for a growing economy. Inflation pushes general prices to a level where people cannot afford to buy goods to meet their daily needs, thus hurting the overall demand.
Source: http://www.nirmalbang.com/Research/BeyondMarket.aspx?id=31&type
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