The US share markets: a load of bull?

5 minute read

Correction. Crash. Call it what you will, but some analysts are calling it the end of the bull market. We spoke to John Carran, Kiwi Wealth’s Senior Economist, about what the markets are doing (hint: it’s been a wild ride), and what, if anything, we can do about it.

Ines @Hatch: The markets are looking grim - especially in my Hatch account. What are investors supposed to do when things are looking this volatile?

JC: It can be uncomfortable investing in shares in times like this, for sure. However, it’s important to realise that this is normal. Share markets can bounce around a lot in a short period of time. Declines in share markets of at least 10% happen on average at least once a year, so what we’ve seen in recent days is well within market norms. Declines of 18% or more happen an average of once every six years.

If you only have a few shares, then the price swings can be even larger. That’s what you’re getting into when you invest in shares. However, over the longer run, the share market has recovered and delivered returns that have exceeded investments in safe areas, such as term deposits or government bonds. This has been the reward for staying with shares through the ups and downs.

Ines @Hatch: John, it’s time for a scenario. Say I'm just new to investing, and while I find it thrilling, I’m also freaking out at losing so much on my *cough* cannabis stocks, how am I supposed to not panic when my losses are so considerable?

JC: Before you invest in shares you need to ask yourself whether you can tolerate holding on through the downs that periodically occur. If the answer is no, then maybe you’d be better off investing in less volatile investments.

The swings in individual company shares can be even greater than the share market overall, so a first step may be to invest in a diversified investment fund or an exchange traded fund (ETF). These largely follow the overall market, so while they can still go down a lot when the overall market goes down, you reduce the chance of significant price drops in any individual company shares.

It is extremely hard to sell at the right time when markets are declining. The risk if you sell in difficult periods and buy when the environment looks rosy again is that you make losses near the bottom and then get back into the market too late, missing out on gains on the way up.

However, if you have closely researched your investments and believe they will do well over the longer-run, and you can tolerate holding on during the significant down periods that happen from time-to-time, then it may be better to stick with them.

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Ines @Hatch: But John, what I really want to know is, why are the markets freaking out? What's happening from a macro perspective that's causing the mayhem?

JC: In many ways the environment continues to support shares overall. The world’s largest economy, the US, is growing strongly. Prices and wages are only rising moderately, despite growing economies and falling unemployment. Company earnings are growing. There’s little sign of dangerous credit growth.

However, recently many investors have started looking past this to the day when the environment won’t be so rosy, perhaps later next year or the year after. There are concerns that the trade war between the US and China, and rising wages might raise company costs. There is the possibility that Italian government financial largess might eventually cause distress for Italian banks. There is nervousness over the effects rising interest rates and a higher US dollar are having on highly indebted emerging markets.

The risks have undoubtedly increased, but it doesn’t necessarily mean that any of these developments will cause a global recession or substantial market sell-off in the near-term.

Ines @Hatch: How are smart investors supposed to act in a bull market?

JC: Smart investors should act the same in a bull market as they do in a bear market. They should know the risks they are willing and able to take and invest accordingly. A smart investor will thoroughly research any investment they make. If they don’t have the time or knowledge to invest in a small number of individual shares, it may be better to invest in a diversified investment fund or ETFs that give broad exposure to share markets, with less concentrated risk.

Share investing can be rewarding, but it’s not for everyone. Every investor has their own reason for investing in shares, but they should do so with their eyes wide open to the risks as well as opportunities.

Ines @Hatch: Have tech stocks had their day in the sun? Is it time to dump and run?

JC: That’s not something I can answer. Investors have to make up their own minds on that based on their assessments of the industry, how successful the companies in industry are, and whether current share prices are over or under-pricing future profits, among other things.

Ines @Hatch: Fair enough. Now, I know you can't predict a crash, but on the downlow, is a crash coming?

JC: Sorry to disappoint, but I can’t predict when the next market crash will occur. Some people say they predicted past crashes, but often you find that they are always predicting crashes; like a stopped clock they are bound to be right at some point in time. If you try and time your buys and sells based on when you think a crash is going to occur you will most likely end up worse off than if you stick it out all the way through. It’s uncomfortable at times, but it has paid off over long periods in the past.

John is a Senior Economist and Portfolio Strategist with Kiwi Wealth. He monitors economies and markets to identify investment opportunities and risks across asset classes, regions, sectors and industries. John writes frequent blog articles for Kiwi Wealth, as well as writing newspaper articles and doing radio interviews.

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