Is the economy really down?
In the wake of the COVID-19, I have heard a few repeated remarks from people about the economy. For example, “The economy is touching rock bottom” or “We are entering into a recession.” or “The economy is never going to come back to normal. ” But to know the truth in those statements, let’s dive into the root of what drives the economy.
People consider the stock market as the barometer of the economy. Be it Nifty, Sensex of India, or Dow Jones of America. If the stock market is doing great, that implies the economy is doing good. If the stock market plunges, then the economy is not doing well. In a nutshell, the economy is directly proportional to the movement of the stock market. But do you agree?
With due respect to your opinion, I think a little differently on this. Before you ridicule me for my opinion and pull hair out of anger (definitely yours 🙂 ), let me put my two cents in front of you. Do you know what the percentage of people is out of the total population of India holding the De-mat account? It is approximately 6 percent.
Hardly, 6 percent of the Indian population take part in the stock market and decide its value creation. So, does it make any sense to measure our economy based on the opinions of the 6 percent of the population? It’s analogous as electing our country’s Prime minister with the votes of minority percentage of people, and the rest of the people’s votes do not matter.
When this 6% of people feel the market is overvalued, they sell the stocks. The market plunges when those people oversell the shares. And then we call it “Down Economy.” And again, the many people out of these six percent are not market experts and entirely rely on the news broadcast in the mass media. Well, I am not against the mass media, but from my personal experience, most media broadcast biased financial news, which is in their interest.
Besides, our social media is full of viral economic news, which is primarily negative. So, people sell their stocks in a panic because of the chaos resulting from viral news on social media. In the end, the stock market plunges due to the over-selling of shares, and people make remarks as the economy is down.
Factors of economic decision making:
So, to decide the economy, let’s first try to understand the stock market and the supply and demand of the commodity. And to understand those things, you need to understand the money or currency supply. RBI publishes the Money Supply(M3) data in our country regularly. Follow that. M3 supply is the supply of the money to the below four categories. They are
• M0= Currency in circulation + Banker’s deposit with RBI + other deposit with RBI
• M1=currency with the public +demand deposit with the banking+ other deposits with the RBI
• M2= M1+ Post office savings banks’ savings deposits
• M3= M1+time deposits with the banking system
• M4= M3+office savings of bank
Based on the Money supply data, we will know how much money the Reserve Bank of India supplies to the public, Bank deposits, and bank credit to the commercial sector. According to that, we forecast which markets will go up and which markets will go down. That is the correct way of gauging the market or economy. And, if you are looking to buy stocks, please check these 5 lessons which will help you to pick up good stocks.
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I hope this information is useful to you. To know more about “how the current economy is doing” in detail, please reach out to Investment Unblocked on WhatsApp +91 9853322111.
Be well, and stay safe!
With best wishes,
Prasad Rao
Investment Unblocked
Bhubaneswar, Odisha