Is recent market volatility cause for concern or not?

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Is recent market volatility cause for concern or not?.

Larry Williams:
So Black Monday or Black Tuesday or shouldn't I be saying that?

Carmel Fisher:
I don't usually like talking about significant market movements and the reasons behind them because markets will invariably revert soon after you comment, so your views very quickly become old news. And also, while we can all give an opinion as to what has prompted a share market movement one way or another, it is never just one thing — there are always multiple factors that influence a market's behaviour on any given day.

But the last few days' share market movements have been more extreme than we have been used to, and they've generated all sorts of comments and sensational headlines, which frankly I find frustrating because they are not helpful for investors. When I saw a headline yesterday afternoon in the NZ Herald talking about a share market bloodbath and my neighbor, who never talks to me about markets, asked me how much the New Zealand share market might fall today, I thought, there might be some people who have been spooked by the last few days and it might be time for a bit of perspective.

Larry Williams:
This correction was not unexpected was it?

Carmel Fisher:
The last two or three days have been negative and volatile and basically unpleasant for anyone invested in shares anywhere around the world. It is not so much the magnitude of the falls but the volatility and the fact that it's all happened in a matter of days rather than being spread over months.

When the US share market fell last Friday it was only a 3% fall, which in the context of a 200% gain over the past six years is neither here nor there. But the fall pushed the market into negative territory for the year to date, so it basically erased all the gains that have been eked out since January.

Some suggested Friday's fall was really significant because the S&P 500 Index finished below the "psychologically important" 17,000 level, but that's nonsense because when the market smashed through the 14,000, 15,000 and 16,000 on the way up, nobody batted an eyelid.

The most headline grabbing market action yesterday was the Chinese share market that fell 8% in a day, but again, that market has been crazy volatile and had huge gains in the last year so an 8% sell-off is not as big as it sounds.

Larry Williams:
You don't buy into the cause of this, that China is the cause of the sell off?

Carmel Fisher:
Most say that it's all about China, but that just doesn't wash. China has been a concern for months now — not because it is collapsing and taking the rest of the world with it — but because its economic growth is slowing to a level that is still much better than other world economies and even when it slows it will still be sufficient to help other economies to grow and avoid recession.

The announcement that the markets supposedly reacted to on Friday was a manufacturing PMI which showed that 47% of Chinese firms reported increased output. This piece of information on its own was certainly not enough to trigger the events of the past few days, which to me, is further evidence that this is a sentiment-based market movement rather than anything fundamental. A fear-based correction is far easier to cope with and will likely be more short-lived and less painful than a full-blown crisis based on something fundamental as we saw in 2008.

The only good thing about recent days is that it has been a good reminder or wakeup call for investors, who may have become a little complacent because shares have been largely one-way traffic for some time now. Before last Friday, the US share market had traded in a very narrow trading range. From its year to date high to its year to date low, the Dow Jones Index has moved just 6.7%, the narrowest range in its 100 year history. So the market has been broadly flat for a long time, so it's no wonder that when there's finally some action, people jump to attention.

Larry Williams:
So you think this is a correction but not a proper correction and that's going to happen in the future? 

Carmel Fisher:
Absolutely. It's a correction and probably one among many and there might be a bigger correction that turns into a crisis sometime in the future. In fact there will be but we just don't know when but I think that for investors, your reaction to the market selloff in recent days can be useful in giving you an idea of how you might react when a bigger, more serious drop occurs (which it will, one day). So I suggest that even if the volatility continues for a few more days or weeks, treat this as a rehearsal or a practice run and check whether your response is an appropriate one.

If you are a buy-and-hold investor with a long-term investment plan you should test that your diversified portfolio has worked the way it was intended. Did your portfolio fall yesterday as much as the markets or did the fact that you had spread your investments across different assets and stocks help you weather the storm better than most? We know, for example, that fixed interest investors didn't lose money yesterday like share market investors did, that the NZ share market didn't fall as much as the Chinese share market, and within the NZ share market not all stocks fell to the same extent. And some, like Infratil, even rose on the day!

If you are a tactical investor who buys and sells as opportunities arise, then the last few days should have been nirvana for you, assuming you were able to hold your nerve. Our investment team did some selective buying yesterday and will continue to do so in coming days if the baby gets thrown out with the bathwater and good quality investments get pushed down too far.

If on the other hand, you have found the volatility of recent days just too much to handle and you've lost sleep, then chances are you are in the wrong investments and you should seek advice because a different asset mix might suit you better.


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