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Money: Ups and downs – making sense of current financial markets

22 Nov 2018

Share markets have been on a roller-coaster for the past 7 weeks. What should we make of it?

Is this the end of the recent good run we have had out of shares, or is this just volatility, the normal ups and downs in value that comes with owning anything?

Some readers will be new to the investing game. Others will be old hands and nothing I say today will be new to them.

Here are some facts and figures on the markets I collected this morning:

  • Share markets around the world are influenced by what happens in the US markets. Why? Because the US markets are so big with over 50% of the world’s total market value. Bigness means things tend to happen there first. They are the most diversified country in the world too. Local matters affecting other countries are important too, but everyone looks at what is happening in the US first and it flows out from there.
  • In the US, we look at the top 500 companies (the S&P 500) and they are down 9% since their high on 20 September 2018. Within that, some companies are down over 20%, but other companies are up in value since then too.
  • A fall of 10% in market value is often referred to as a ‘correction’. A fall of 20% in market value is referred to as a ‘bear market’.
  • We have already had a correction in the US markets this year. It began in January and ended in February 2018. This was followed by another correction in March and then we had nine months of relative good growth in value.
  • For every seller of shares, someone is buying believing they are getting a good deal. Remember that.
  • In New Zealand, amongst the top 50 companies, yesterday 20 companies were up in value, 20 were down in value and 10 went sideways. Overall the market was down 0.8%.
  • Economies are generally in reasonable shape around the world with America going particularly well. Their central reserve bank has raised interest rates a miniscule step to try and keep it from getting too hot. They talk about raising interest rates again until they reach 3.25% in 2020, two years away. If the US reserve bank sees that the US market is slowing, then they won’t raise interest rates as quickly as they intended. In that respect, they have a safety valve.
  • Everyone is worried about a trade war with China but so far it doesn’t appear to have affected the New Zealand economy, but it might. Both sides will be looking for a face-saving compromise. This problem is a political problem rather than purely an economic one even though there are important economic issues at stake.
  • Having shares means you are an owner. Having bonds or term deposits means you are a lender. Owners get paid more than lenders, over the long term, but they take more ups and downs in their values. There is no free lunch.
  • The recent fall in share markets is a ‘forecast’ of a type by some owners of shares that the US economy will go into recession at some stage in the future, possibly about 18 months ahead (2020), as 18 months is about how far shares investors think they can see ahead. This is not a particularly accurate or reliable forecast, but one day it probably will be. Using my own phrase, ‘share markets dance with shadows’. One never knows what may one day pop out of the shadows!
  • The bond market is quite a good place to look for a forecast of future prospects. The bond market is meant to be a more reliable forecaster than the share market. Things usually start there. The gap between 3-month bonds and 10-year bonds tells us something about the opinions of bond investors and it is currently positive at 0.65%. This is known as a ‘positive yield curve’ and such a gap between those two rates does not a recession forecast.

 As always there are risks around and no-one can tell whether they might blow up into something bigger, or just go away. For example, Brexit failure in the UK is an obvious risk that could go awry.

Another risk is the amount of low-quality business debt in the US which has been ‘collateralized’ (split up and leveraged) into new investments, just like home mortgages were before the Global Financial Crisis. There have been lots of warnings about these.

There are always risks in the political, economic and investment worlds. What we see today doesn’t seem too different to any other period.

My answer to all this is to create a portfolio with a mixture of as many kinds of investment one can find and hold them long-term, riding through all the real and false reactions along the way.

Everything we see today is temporary.

Long-term, everything is much more enduring. People work hard every day to better themselves and their families. This doesn’t always show up in market prices day-to-day, but it does over the long term.

My conclusion is that this is a good time to be invested as an owner, with huge long-term potential everywhere I look in the world.

These are my beliefs. The future … belongs to the brave.

Keep asking great questions …

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