Where do we go from here?

I am bearish.

But bears seldom make big money its the optimists who do.

I am not very well versed in macro economics. I also 'feel' economists are not well versed too. Having made that point I am unsure what the equity markets world over are doing. Why does it continue to rise when everyone on the street or elsewhere knows that corporate profits are dropping and could drop to record lows, companies have begun to file for bankruptcy and joblessness is increasing. But why is the stock market rising? Is it only liquidity which moves the market? I don't know.

US FED has pumped in a whopping $3 trillion for Covid related stimulus. To put that into context that is greater than the GDP of India. The S&P 500 has reverted as if it was a minor correction.The Indian indices are charging ahead. But the FED chairman has to say the following "We will make our way back from this, but it will take time and work ... The path ahead is likely to be challenging." Mr Powell adds "Lives and livelihoods have been lost, and uncertainty looms large."

The volatility for VIX India is touching lifetime highs and persisting. The macro and productivity indicators are falling. But the market is surging ahead, for instance in June as I type this Nifty has gained 5% odd. Why? What has improved fundamentally? Haven't things deteriorated? I understand the market is a discounting machine. But is the discounting of this Covid impact so insignificant to the markets?

We are at approximately 15% drawdown which is about the median levels of drawdown for nifty since 1999. So the market doesn't even think that Covid is some big event now.

Now what should I be doing. I don't know what you should be but I can talk about my plan of action. I strongly stick to my money management framework. I continue to hold all the stocks I do in my core portfolio, though I have reduced position in one of them.  I continue to add onto a couple of stocks in limited quantities. Apart from core portfolio my non discretionary portfolios work on auto pilot, they have their methods of 'shutting down' when s**t hits the fan. So risk is managed well there. I have a substantial exposure to US markets. I continue my SIPs. For a small time retail investor with say a million dollar portfolio it doesn't make any sense to take disproportionate risks to show returns as there is nothing to prove.

Some points I want to reiterate to myself:
  • Cash is always king, it is the greatest option position one can hold.
  • Never fight the market.
  • Selling equities should be the most difficult thing to do.
  • Capital protection is more important than capital appreciation.
  • Listen to everyone but always think for yourself.
  • Asset allocation is more important than stock selection.
  • And the most important - always stick to your system.
Good luck!

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