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Market corrections

Market corrections

   After a fairly long bull run, the market has corrected (fall of 10% or more from a recent high is considered a correction). This correction happened right before Diwali and there is panic in the market.

So why does it happen?

Markets can correct for a variety of reasons

  1. Macro economic reasons

    • Crude oil prices going up - India is dependent on Crude oil imports for most of its energy needs. So when crude goes up, Indian government needs to import crude at higher prices in USD

    • INR / USD weakness - This is tightly coupled with crude prices as well, but there might be broader conditions that might trigger weakness

  2. Seasonal

    • Rain, draught conditions can trigger corrections - We are still a very agrarian society and agricultural production is very dependent on monsoons. Monsoon can therefore swing the economic fortunes of the rural populations.

  3. Political

    • Elections - the selection of the ruling party (state or center) plays a key role in the market performance

    • Scandals - corruption, scandals (Mallya and Nirav Modi - come to mind) can cause rout on certain counters or entire sectors

    • Policy - Tied to ruling party, as the government policy changes could have serious implications on gas prices, exports, production etc.

  4. FII pullbacks

    • Global policies - have an impact on Foreign Institutional Investors (FII) which may lead them to invest or pull back money from the markets

  5. Overbought market conditions

    • Sometimes correction can happen because of a long bull run and participants want to book profits and there could be pull back.

There might be other reasons for corrections as well, if you are invested for the long term, these corrections should not bother you.

Corrections are good

  Let me start with Diwali, why? Humour me. Diwali is one of the biggest spending seasons in the country. Diwali is the black Friday equivalent of Indian retail. People making these purchases feel that they are getting a good deal, the prices are cheaper and the seller makes up the difference in volume.

  We are happy to spend the money to pick up stuff that we need (or want) at a cheaper price. Should the same apply to markets? When there is a market correction, prices of stocks fall and shouldn’t we apply the same logic here as well?

It gives us a great opportunity to pick up quality stocks at cheaper prices. So when there is a correction why are people worried. It reminds be of

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” -  Warren Buffet

Celebrate these corrections, you are buying quality stocks at cheaper prices. Hope and pray for more corrections and mental strength to stay the course.

Happy Investing - #MyFatFIRE


References

Rafael Matsunaga - Flickr

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