We tend to freak out when markets fall. It’s times like these that give us a real sense of panic, the feeling that usually causes us to sell out. To prevent further losses, we tell ourselves. Owning stocks/funds and seeing them tumble by 30%-40% (or more, as many have have done in recent months!) is not a nice feeling. At all. But it’s also the single worst moment to sell. Market downturns are inevitable. Markets are bound by the physics of supply and demand, influenced by monetary and fiscal shenanigans and they do not operate in a vacuum. Much as we’d like to think they’re in a total world of their own. Unaffected by all that’s going on around them. But they’re very much influenced by all this stuff. And as investors, we shouldn’t forget that. But something tell me we won’t, ever!
Now since markets go up and down, we have to be prepared for the downs as well as the ups. And when markets enter correction territory (a decline of 10% or more), it reminds us that markets can’t go up forever. And when markets take a tumble, that’s usually when sentiment starts to turn sour. Since markets are forward-looking, they move quicker than the economy does. When recessions occur (which happens every 5-7 years), the markets will move out of it when tomorrow looks slightly better than it does today. All it needs is some good news, some hope, and for investors to hop aboard. And it’s precisely at this point that markets rebound and then – only when markets start going up, do the rest pile in. Missing out on tons of gains had they been invested the whole time or, been brave enough to wade right in. Amidst all the carnage. Read here how you can become a better investor in 2022.
What we’re seeing right now is something pretty unusual and usual at the same time. Let me explain. It’s usual in the sense that markets always lose steam at some time or other. Recessions, crashes, corrections, bear markets, you name it, are all part and parcel of investing. They’re totally normal and very expected consequences. But what we’ve got going on now is unlike anything we’ve seen before. If you’re feeling in need of some (investment) shelter, read here about these 7 hiding places.
The Fed’s In A Pickle
The Fed began winding back their QE in 2018 but then markets crashed. The S&P 500 declined by as much as 17% between September-December 2018, then grew by 38% until February of 2020 and then boom covid hits. Central bankers had to get back on their horses and turn the money printer on. At full speed. Running as fast as their legs could carry them. For the Fed, growth was their top priority. Not jobs as was Europe’s focus. Read here what that’s doing to their workers. And they pulled out all the stops when it came to protecting it. As a result, the US stock market soared to new heights, bringing everything up with it. Assets, from houses to stocks to NFTs began to inflate. And inflate. And inflate. Until they hit dangerously high levels.
But now, the economy is getting too hot. Inflation is frothing everywhere. Here in the UK it’s terrible. Energy prices will soar by 54% come April and some 6.5 million households will be in fuel poverty. Food prices are on the rise, too. And it’s hurting the poorest. Then you look at jobs, or the lack of workers. In the US this problem is nasty. They’ve got a shortage. The CPI numbers for this month came in for the US and they’ve got inflation running as high as 7.5%! It’s not been this high in 40 years. Read here whether inflation was inevitable all along, plus 4 ways in which you can get your purchasing power back.
The Fed is grappling with something pretty unprecedented. Raising rates to turn down the heat on inflation risks causing a stock market crash (that’s kinda already started) since it’ll reduce valuations (by lowering the present value of future cash flows). Aka bad for all this high growth no-profit stuff. The kind that’s done extremely well during this period of ultra-loose monetary conditions. It’s been perfect. But as they say, a rising tide lifts all. And now we’re seeing exactly who’s been swimming naked! Read here whether this is the beginning of the end for growth stocks. I would mention, though, that allowing inflation to run wild will erode some of the debt that central bankers have run up (the Fed has taken on $3 trillion!!) but rising rates means their debt becomes way harder to finance. Yet failing to take action is like pushing the can further down the road. And it’ll put pressure on jobs, not to mention reduce our money’s worth. The dollar’s debasement is not something to take lightly!
A Humbling Correction
All in all, this strange and confusing environment is causing panic across markets. Investors are beginning to flog their stuff for fears that things could get a whole lot worse and lose them a whole lot more money. No surprise then that gold is up ~5% this month, doing better than stock, and bonds. Read here about these bricks that did better than gold ones!! But selling on the down is literally how you lose money. It’s only a loss when you sell. Otherwise, it’s all just paper losses. The S&P 500 lost 9.3% since Jan 2022 while the Nasdaq lost 12.8%, correction territory. They’ve already lost some steam. And boy was this correction long overdue. The valuations of some companies got way way way out of hand (cough, cough Rivian) when looking at their actual earnings (if any!).
It’s all those earnings (or the lack of) that should be driving share prices; not the other way round. And I think this correction gave us all a much-needed taste of reality and a hint of what could come if markets get ahead of themselves. It’s no surprise that in this storm, the riskiest assets started falling first. That would be bitcoin who fell as much as 40% since November 2021. Then came the high-growth, non-profit-making tech guys. And the pandemic stocks (the pelotons and Zooms of the world). They’ve all tanked. Oh, and Meta (previously facebook), along with PayPal lost 26% of their market cap. In one single day!! Markets are going bonkers. But I suspect it was a long time coming.
To Buy, Or Not To Buy?
Jeremy Grantham, the guy who called the past bubbles, is calling this one a ‘Super Bubble’. Sandy Nairn has written a book recently in which he says the collapse of this everything bubble could wipe out $75 trillion worth of assets. Trillions, yeah! So it could very well be that it gets a whole lot worse before it gets better. But right before it gets better, you want to be ready. And building up a cash pile during these downturns and frankly uncertain times can allow you to pounce. To snap up stuff on the cheap. And that’s exactly what I’m doing. Cash is is king.
Through taking a long-term approach, by investing consistently, your losses will smooth out and turn into gains. You’ve just gotta have the patience to stick around till then and not give up. But anyway, it could be that the bubble has already started to burst I mean if you look at some of the tech stocks over in the US (and in the UK, too, with the little tech we have) some of them, like Zoom and Peloton, they’re down 75%. But I think that not investing is just as risky as investing. Though read here why Gen Zers are turning to riskier things. Every day brings something new and no one knows what’s lying round the bend. I mean just look at how quickly a war in the East emerged and now Russia is going to invade Ukraine! But if you’re investing for the long-term, time is your best friend. If you’ve got decades ahead of you, markets will have long recovered by then. If, on the other hand, your time horizon is short (<5 years) then best to hold off. In any scenario. Since 5 years just isn’t enough and it’s too risky to be in markets.
But there are those who are eying this market very closely as solid stocks (aka all that good quality stuff) have ended up in the bargain basement. Opportunities are everywhere. The best time to buy, quite frankly, is when others are too scared. To quote Warren Buffet: “Be fearful when others are greedy and greedy when others are fearful”. And right now, in the midst of this market correction that could very likely turn into a bear market, is when investors are most scared. They’re scared that prices will continue to fall. But just when tomorrow looks slightly bright(er) than today, that’s when markets will have already risen. Signalling that the worst is over. And by that point, should you dip your toes into the market, ever so cautiously, you’ll probably have already lost out. And most definitely missed the dip. Markets move so fast that you can never really time them. So best to remain invested throughout, resisting the temptation to sell but topping up your holdings on the dip, allowing you to buy solid stocks, on the cheap. Who doesn’t love a sale?! But when markets go ‘on sale’, most investors freak out. But resist the urge to do and you could be looking at owning some serious bargains. The kind that would rise in value once the worst is behind us.
From Crashes To Opportunities
And while the Fed is clearly going to start tightening its belt, interest rates are likely to remain in the doldrums. As long as they’ve got sky-high debt, you can count on that. You know what they say, watch what the Fed does and you’ll know where markets are headed. This means that loose interest rates (maybe not quite as loose as we’ve had but pretty loose) are all good for long-term stock prices. We’re also seeing some demographic and tech drivers that are all weighing down on interest rates. Tech is the future and right now, we’re in the middle of a revolution. Read here about this revolution on wheels. But we clearly got way ahead of ourselves. And markets have a funny way of humbling us. Showing us we don’t know it all. Bull markets fall everyone into thinking they’re a cracking investor.
So, dear reader, have some patience. And remember that fortune favours the bold. No one said stepping into stormy seas was easy but if it were, there’d be little rewards, if any. And understand that if you’re investing for the long-term, which you probably are, markets always recover. It’s a question of when, not if! So have some faith and conviction in your investment approach and you’ll be able to ride out anything. From corrections to crashes. Just don’t get paralysed that you never end up investing. Cause that’ll be far worse.
On that note, make a list of all the things you want to buy in this clearance sale. Then, when you think the time is right, step in and enjoy your purchase. Your future self (and portfolio) will thank you for it.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.