IMAPACT OF RECESSION ON STOCK

MARKETS

Introduction

Economic activity usually passes through the four phases – Recession,

Depression, Recovery and boom. When GDP and the employment are declining, the

economy is said to be in a Recession. Which when deep becomes a depression when

output and employment are raising the economy is to be in a phase of recovery, which

becomes boon as full employment nears and industries operate at maximum capacity.

Recession can be defined as “significant decline in economic activity lasting more

than a few months which is normally visible in real GDP real income employment

industrial production and wholesale retail price” The vulnerability of recession leads to a

decreased demand for goods and services which in turn to a decrease in production lay

offs and a sharp rise in unemployment. The recession period the consumers loose

confidence in the growth of the economy and spend less.

The recession also affects stock market also. In this period the investors fear to

spend for the stocks ultimately the stock value will fall and thus stock markets fall on

negative sentiment.

As per observations of post war recessions the economy was affected in the

investment production consumption and inflation oil, prices inventories and equity prices.

The investment as declined the stock market fell down for a 6 months.

A economy which grows over a period of time tends to slow down the growth as a

part of the normal economic cycle. A recession normally takes place when consumers

lose confidence in the growth of the economy and spend less. This leads to a decreased

demand for goods and services that are in turn lead to a decrease in production lay offs

and sharp rise in unemployment. Investors spend less, as they fear about stock values

will fall and thus stock markets fall on negative sentiment.

Some recessions have been anticipated by stock market declines. In Stocks for

the Long Run, since 1948, ten recessions were preceded by a stock market decline, by a

lead-time of 0 to 13 months (average 5.7 months), while ten stock market declines of

greater than 10%. Since the business cycle is very hard to predict, it becomes too

difficult to take advantage of economic cycle for timing investments.

The present study will focus on the impact and analysis of the recession on

Indian stock markets and the real economy.

Findings

1. The study finds that as trading is risky in recession period the majority of 46% of

respondents preferred to trade in forward as a low risk. Moderately, the

respondents preferred future trading. Spot trading, Intraday Trading, and options

seem high-risk mechanisms.

2. It is found that in the recession period the majority of respondents have experienced

that equity investments beared highest risk. Moderately forex and commodity

assets beared the risk. Debt beared slight risk. But Gold is not much affected in the

recession period.

3. The majority of (66%) respondents preferred to hold their investment in recession

period better than trading. Moderately 24% of respondents go to hedging because of

safe keeping their investment. A few number of respondents sold their holdings

because of fear of further down fall in the market.

4. The majority of 90% of respondents experienced the worst affect of recession on

stock market. They lost a greater loss of their holdings.

5. The majority of 68% of respondents preferred purchasing the stocks in the market

better than selling. Selling in the period of recession losses more and as prices

reduced it is said to buying is better. It can be possible to extend the investment.

6. The majority of respondents preferred Bank Savings as better avenue for

investment. The moderately, the respondents preferred to invest in Insurance and

Postal Saving Deposits. Stock Investments beared highest risk in the period of

recession.

7. In the time of slowdown, the more number of respondents preferred buying for long

time is better than the buying for short term. No one expect the market condition in

volatility situation. There is greater reduction in share prices and investor can easily

get the shares. So they found its better to buy and hold uo to market recovery.

8. The majority of respondents has experienced that I.T sector suffered much. Real

estate and Fast moving Consumer Goods also suffered in a same way. Only the

insurance and banking sectors are not troubled much. The reason is that strict

regulatory policies and timely guidelines of Reserve Bank of India, and cutting

down of Cash Reserve Ratio and Repo Rates.

Suggestions

1. Economic forecasts are particularly uncertain. While it may be reasonable to

suggest that, the government should be making contingency planning to overcome

the sudden vulnerability.

2. Many countries like U.S and European countries infused direct bailout packages

to overcome the liquidity problem. Moreover, there is a discussion going on the

Keynianism theory also. It is the better suggestion of short term uplifting of

affected areas. There is need for infusing amount for affected area to overcome

the sudden occurrence of slowdown.

3. The Foreign Direct Investments companies and Foreign Institutional Investors

started short selling when sensex fell down severely on October and November

2008. It caused a heavy effect on the Indian stock Market. There is need for

making strict policies and controlling the inflows and outflows of FDI and FII

money.

4. In the I.T sector, there should be correction in Salary Offering rather than job

cutting.

5. While trading in stock market and taking decisions towards investment in stock,

the public should spend wisely and save more. They have to sell risky assets

immediately and to park their money in Government Securities. The Indian banks

provide safety for investments. Insurance sector also provides safety and high

yield investment portfolios.

6. In the period of slowdown, the equity investments would be affected more. It

may be suggested that trading Gold and Commodity provide better returns

without loss. In case of Forex trading, hedging technique provides to safeguard

the investments.

7. Majority of respondents opined that purchasing is better than the selling in

recession period. It may be suggested that before going to extend the portfolio

investment the public should make market analysis.

Conclusion

There is a phenomenon that all emerging economies go for the

recession following the development. The recession affects the overall economy in

the face of commercial sectors. The hiking of oil prices, interest rates, inflation rates

and low consumption cause the reduction in revenue and also it cause the stop in long

term projects. The banks lose confidence to provide loans to the corporate. The

money will be blocked in the form of finished goods. The market suffers liquidity

problem. The public loses confidence in investing shares. Ultimately, it causes the

reduction of share prices. Investors start to sell their holdings. It takes the market as

bearish. The stock market suddenly begins to fell down.

Here is an excellent opportunity for policy makers to shape the direction of

the economy for the good of the common man. With funds becoming scarce,

available resources should be directed to sectors that will improve the quality of life

for the common man. Priority must be accorded to infrastructure like power, road

and rail transport besides transport facilities like the metro, rural development, public

health and school education.

Banks and financial institutions hold public money in trust. They have the

responsibility to deal with it with great care and prudence. There is no space here for

adventure. The public sector nature of the Indian Banking system has ensured a

conservative approach. The private sector players to adopt this approach following

the public perception of them after crisis.

Globalization is no doubt great concept. It creates a global village that means

all countries are in one bucket without barriers. But there cannot be unfettered freedom.

There is free convertibility of funds and flow of funds resulted in crisis. The banks are

not fully leveraged in foreign countries. So it is needed to banking reforms in

international reforms. The international bodies should take ante-recessionary measures to

maintain viability and accountability in international trade relations.

Manjunatha S MBFI

Guest lecturer Kodachadri Govt College Hosanagara+91 9886501119

(awaiting for valuable suggestions and guidance

manju.mbfi@gmail.com)