Inflation is always bad news. This is nothing new anymore now is it? I have already written several posts about inflation in the recent past. Generally it affects your expenses, but when central banks decide to fix it, your investments also take a hit. Take the case of FED and US stock market. First the FED printed way too much money and the government handed free checks to everyone during COVID-19. At the time it seemed like a good idea. Later, when the FED wanted to stop printing, it could not because, well, socialist activities are hard to discontinue. Moreover the stock market would get spooked every time they even mentioned quantitative tightening, let alone interest rate hikes.

You can’t inflate money for ever by printing more. When you give money freely, it eventually enters all kinds of markets including speculative crypto and equity markets. Everyone with internet and a brokerage account thought they are investors and drove the market up. On top of that the money supply also caused inflation to go up. Read my previous article on why that happens in case you didn’t already know.

When inflation goes up, the central banks, called the FED in the US have to take action to keep it under control. The way it is done is by increasing interest rates. If you are wondering how raising interest rate will reduce inflation, read my post on it. That post also explains how interest rate hikes affects stock market, debt funds, FDs and EMIs so I won’t go over that again here.

So far so good right. We have all the information to understand why we have inflation and how it can be controlled by central banks. We also understand the side effects of such rate hikes. The rate hikes in the US tortured the stock market, especially tech stocks quite a bit. The S&P 500 index which tracks the stock performance of 500 large companies listed on exchanges in the United States dropped 20% from the peak. Well, it dropped 30% during COVID-19 crisis, but now it is a different story. No businesses are shutdown. People have started moving freely like before, companies are performing well, yet, we saw a 20% drop. While NASDAQ 100 tech fell more than 35%.

S&P 500 lost 20% year to date

What I found interesting was that while the US markets were dropping in the past week, the Indian stock market was holding up well. Eventually it dropped on Friday. That one day I saw a big pile of cash getting wiped out of my corpus, notionally of course. Imagine a few months worth of expenses just vanishing in one day :). That is what stock markets can do to your corpus. Anyway I am not here to tell you what happened. I am now wondering how bad this can get. Finally FED is serious about inflation and doing something about it. Until now they were convincing themselves that inflation is transitory.

Somehow I have a feeling that FED will step on the gas of raising interest rates. That can mean only one thing – more pain in the stock market and Indian stock market will not be immune to it. Meanwhile, we are having our own struggles with inflation and RBI has been hiking rates and will do it again if needed. FED rate hikes means more unemployment as costs rise. So folks, lets prepare ourselves for a recession. Of course no one can tell if the recession is going to happen tomorrow or in 1 year. So don’t sell all your stocks already :). Just follow your asset allocation. Looking forward to some interesting times ahead.