The United States, being a superpower, can cause its domestic economic events to have a global impact. However, in the last five decades, whenever a recession got triggered in the U.S., Indian stock markets see boom time a year after the recession. The chart below illustrates this.
Central banks become the forefront for economic revival after a recession, especially by money printing that stimulates purchasing and production. This can be understood easily with the graph below that shows how the U.S. Federal Reserve’s balance sheet grows during recession times. Over the last year itself, globally, the central banks have printed 20 trillion dollars when the world faced economic downturn during the coronavirus pandemic.
As a result, the cost of money/capital has reduced drastically because of now extra money in circulation trend in the USA and India. Central banks also lower their interest rates so that money is available more easily to stimulate the economy.
Historically, it has been perceived that the extra printed money starts to find its place in various asset classes. Usually, the major asset class it finds its way into is real estate, commodities such as crude oil, the stock market and more recently cryptocurrency.
However, during recessionary times, the excess money supply available to retail investors, who are not backed by large banks or funds, generally pump their money into the stock market, because of its affordability and easy access. This is the reason most global stock markets rallied last year, when the pandemic hit the global economy.
The last recession in 2020, has acted as a trigger for effective utilization/execution of reforms like RERA, GST, Atma Nirbhar, PLI Scheme, etc., giving the required momentum to the economy’s growth. As the stock market is quite diverse and constitutes institutional investors and retail investors, significant value creation occurs for established companies in the stock market.
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