If you are a cricket fan, you understand the word “bouncers” perfectly. A bowler throws the ball to the batsman in a way, it goes over the head.
If you have also been to a club/party, you know the job of the bouncers there. They kick you out if you don’t behave.
Markets do both of the above to us all the time. The last 2 days became a perfect showcase of the same.
Yesterday, when Reserve Bank of India announced its decision to meet and then later actually announced an interest rate hike of 0.4%, we saw a big dip of 2.3% in Nifty 50.
This dip was also in anticipation of what the FED or the US Central Bank was going to do later in the day.
But what actually happened in the US? Fed announced a 0.50% hike in interest rates and a plan to withdraw extra cash from the market over the months.
Yet, the markets went up – S&P 500 up almost 3%. What? Why?
Well, because the Fed hike was the expected 0.5% and not more. The 0.5% was already factored in to the markets earlier (yes, they had dipped earlier). And Fed gave no indication of a large hike in the near future. Markets are happy and they celebrated by going up.
Now, the entire world knows that the inflation is rearing its head everywhere and interest rates going up is foregone conclusion.
Then why this extreme reaction by India markets? The ‘reason’ I have heard is that it was sudden. Much like how you apply brakes when a pedestrian decides to give herself priority on the road. You feel a jerk (or like one).
So far, if you still think you are not making any sense of this, well, join the club. This is what markets do. Throw bouncers. Very rarely can we make sense of what it is doing.
I don’t want to waste this limited life by trying to make sense of every news or event.
What’s the best course of action?
Going back to the cricket example, the best course for a batsman facing a bouncer is to duck it. We could do something similar.
Now, we can say that a rise in inflation and hence the interest rates is negative for the markets and there will be ensuing volatility. A reasonable approach at this time is to deploy any investments in a systematic manner and / or continue your SIPs.
Stick to your asset allocation and do not lose sight of your long term mission.
That’s it. It is what will make you win.
If you behave differently, chances are you will be knocked out soon by these market bouncers.