The past week has seen share markets wobble – with US shares and global shares down 4% from their recent high and Australian shares falling about 5% – amidst concern about global growth, central banks starting to reduce monetary stimulus and problems at a major Chinese property developer. Some are even talking about a “Lehman moment” in relation to the latter – a reference to the collapse of Lehman Brothers in September 2008 that contributed to the worst of the GFC. Markets have stabilised a bit in the last day or so but it’s too early to say that we have seen the bottom. This note looks at the key issues for investors and puts the falls into context.
The wobbles in shares reflect a long worry list that has been building for a few months now.
Sharp market falls with talk of “Lehman moments” are stressful for investors as no one likes to see their investments fall in value. However, several things are worth bearing in mind:
First, while they all have different triggers and unfold differently, periodic corrections in share markets of the order of 5%, 15% and even 20% are healthy and normal. For example, during the tech/dot-com boom from 1995 to early 2000, the US share market had seven pullbacks ranging from 6% to 19% with an average decline of 10%. During the same period, Australian shares had eight pullbacks ranging from 5% to 16% with an average fall of 8%. All against a backdrop of strong returns every year. During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. And the last decade regularly saw major pullbacks. See the next chart.
And right now, we are in the time of year often associated with share market pullbacks. Over the last 35 years, September has been the weakest month of the year for both US and Australian shares. See the next chart. US shares have fallen in five of the last 10 September and the Australian share market has fallen in seven of the last 10, with both falling in September last year.
But while share market pullbacks can be painful, they are healthy as they help limit complacency and excessive risk-taking. Related to this, shares climb a wall of worry over many years with numerous events dragging them down periodically, but with the long-term trend ultimately up & providing higher returns than other more stable assets. Bouts of volatility are the price we pay for the higher longer-term returns from shares.
Second, historically the main driver of whether we see a correction (a fall of say 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly as we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC) or the 35% or so falls seen in February/March last year going into the coronavirus pandemic) is whether we see a recession or not – notably in the US as the US share market tends to lead most major global markets. Right now it’s doubtful that the worry list referred to above, while extensive, will be enough to drive a US, global or Australian recession:
Third, selling shares or switching to a more conservative investment strategy whenever shares suffer a setback just turns a paper loss into a real loss with no hope of recovering. And trying to time a market recovery is very hard. The best way to guard against deciding to sell on the basis of emotion after weakness in markets is to adopt a well thought out, long-term strategy and stick to it.
Fourth, when shares and growth assets fall, they’re cheaper and offer higher long-term return prospects. So, the key is to look for opportunities’ pullbacks provide. It’s impossible to time the bottom but one way to do it is to average in overtime.
Fifth, Australian shares are offering a very attractive dividend yield compared to banks deposits. While resource stocks dividend payments may have peaked for a while following the plunge in iron ore prices, they’re unlikely to fall back much as they didn’t go up as much as earnings and high prices for gas, coal and metals are providing some offset. So, the income flow you are receiving from a well-diversified portfolio of shares is likely to remain attractive, particularly against bank deposits.
Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie, just when you and everyone else feel most negative towards them. So, the trick is to buck the crowd. “Be fearful when others are greedy. Be greedy when others are fearful,” as Warren Buffett has said.
Finally, turn down the noise. In times of uncertainty, negative news can reach a fever pitch. But it often provides no perspective and only adds to the sense of panic. All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up. So as always, it’s best to turn down the noise.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.