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When good GDP nos. bring stocks down
Fri, 8 Aug Pre-Open

Last week, the US reported better than expected gross domestic product (GDP) numbers for the June quarter. How did stocks in the US react to this good news? They fell!

They fell?

Yes. They fell. In fact, even Indian stocks fell along with them last week.

Why would they fall to such seemingly good news?

Because investors have, in recent times, been busy playing a peculiar game. That is, investors have no longer only been looking at the US economy doing well for their cues on stock prices. They have instead been looking at the US Federal Reserve continuing with its loose monetary policy as their cue to buy or sell stocks.

And as the US economy improves, they are worried that that monetary policy will start tightening. That is, the US central bank will further reduce the quantum of asset purchases and interest rates will go up from the current near zero levels.

Taking a step back, one quickly realizes that investors first managed to convince themselves that they should buy stocks because the US Fed announced that it was planning to have near zero interest rates as a means to get out of the 2008 sub-prime crisis. And thus they should probably sell now since it might now start increasing them. This even though everyone well realized that ultra-low interest rates were only a temporary measure to begin with.

All in all, leading to this curious phenomenon where we have investors worrying about global stock prices (including Indian stocks) falling on expectations of an improving US economy.

So what should you do?

That's simple. Focus on what is not only important, but also knowable. Focusing on what might be important but is not knowable is a waste of time at the very least. And could even be very dangerous if you choose to invest your money on the basis of such an effort.

We would say that trying to guess how soon the US Fed will start cutting interest rates and whether Indian stocks will move up or down as a consequence squarely falls with the realm of the latter.

Thus it should have no bearing whatsoever on your decision to buy or sell a particular listed business here in India.

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Feb 23, 2018 (Close)