Well, it’s happened, or it’s happening. The correction that we’ve been told has been coming every month since January 2017, arrived. It's been great for getting clicks on websites and selling a few newspapers (do they still print those). Billions 'WIPED OFF' the market! The billions that have been wiped off so far were only WIPED ON since November last year.
Is it over? Probably not, but so far it's quite normal and unexciting.
Normal?
Yes normal. 2017 was an extremely rare year where the entrants to world equity markets enjoyed a free pass to the park and none of the rides had any bumps, jumps or scares. The biggest decline happened early in 2017 and then equity markets happily chugged upwards
How should you deal with this correction? Well it depends on your investment time-frame and your personal objectives, but for most people, you should ignore it.
Like all downward movements there are the regular tea leaf readings, inferences about past crash behaviour being an indicator of the future along with the unveiling of scary stats and charts reminding us of uncharted territory. I particularly like it when those holding gold start screaming that the end of the capitalist world is coming.
In other words, we’re expected to believe it’s eerily similar to 1987, 2008 and the great depression, but it has the possibility to be much worse!
Last Friday’s fall on the Dow Jones was 666 points. Tuesday’s fall was 1175 points. Ouch! To put that fall in some sort of perspective, the Dow Jones wasn’t even worth 1175 points until April 1983. 35 years later the whole weight of that index is a 4.6% daily loss.
Could a correction become a bear market or a crash? Always possible. However, time has shown almost no corrections go further to become crashes. Given enough time, most turn into buying opportunities.
It’s usually a recession that sets off serious bad times in equities. So why are sharemarkets falling when we have the opposite economic conditions in the world’s biggest economy? It’s because investors are reacting to what that growing economy means – inflation and interest rate increases.
Rates fell to historic lows in the financial crisis and have only recently started to rebound. Low rates make investors turn away from fixed interest and cash to embrace shares. With the ‘risk free rate’ rising, shares get re-priced such that the ‘equity premium’ (the extra you get for taking on the risk of shares instead of fixed interest and term deposits) is maintained.
At the same time, an expanding economy means companies will expect greater long-term growth and will expect corporate profits to remain robust.
As usual, if the rough times aren’t over, don’t sell the good stuff that have served you well in hopes of avoiding market carnage. If you are inclined to, remember there is no way you’ll know when to buy again. Despite a correction often being the best time to buy, many investors don’t have the fortitude to don their floaties and enter the choppy water to grab a bargain.
Last year’s stability was an anomaly. Now it’s back to normal programming.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.